Sihuan Pharmaceutical Holdings Group Ltd.'s (HKG:460) price-to-sales (or "P/S") ratio of 2.8x may not look like an appealing investment opportunity when you consider close to half the companies in the Pharmaceuticals industry in Hong Kong have P/S ratios below 1.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Sihuan Pharmaceutical Holdings Group Has Been Performing

For example, consider that Sihuan Pharmaceutical Holdings Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Do Revenue Forecasts Match The High P/S Ratio?

Sihuan Pharmaceutical Holdings Group's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a frustrating 1.0% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 47% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 8.8% shows it's an unpleasant look.

With this information, we find it concerning that Sihuan Pharmaceutical Holdings Group is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Sihuan Pharmaceutical Holdings Group's P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Sihuan Pharmaceutical Holdings Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Sihuan Pharmaceutical Holdings Group, and understanding should be part of your investment process.

If you're unsure about the strength of Sihuan Pharmaceutical Holdings Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.