Gan & Lee Pharmaceuticals.'s (SHSE:603087) price-to-sales (or "P/S") ratio of 8.8x may look like a poor investment opportunity when you consider close to half the companies in the Biotechs industry in China have P/S ratios below 5.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Gan & Lee Pharmaceuticals Has Been Performing

With revenue growth that's superior to most other companies of late, Gan & Lee Pharmaceuticals has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Gan & Lee Pharmaceuticals?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Gan & Lee Pharmaceuticals' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 28% gain to the company's top line. Still, revenue has fallen 26% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 48% over the next year. That's shaping up to be materially lower than the 221% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Gan & Lee Pharmaceuticals' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It comes as a surprise to see Gan & Lee Pharmaceuticals trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Before you settle on your opinion, we've discovered 2 warning signs for Gan & Lee Pharmaceuticals that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.