PharmaResources (Shanghai) Co., Ltd. (SZSE:301230) shares have had a really impressive month, gaining 43% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

Following the firm bounce in price, given close to half the companies operating in China's Life Sciences industry have price-to-sales ratios (or "P/S") below 5.1x, you may consider PharmaResources (Shanghai) as a stock to potentially avoid with its 7.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

How Has PharmaResources (Shanghai) Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, PharmaResources (Shanghai) has been doing quite well of late. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors' willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is PharmaResources (Shanghai)'s Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as PharmaResources (Shanghai)'s is when the company's growth is on track to outshine the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. However, a few strong years before that means that it was still able to grow revenue by an impressive 37% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 19% over the next year. That's shaping up to be materially higher than the 16% growth forecast for the broader industry.

With this in mind, it's not hard to understand why PharmaResources (Shanghai)'s P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does PharmaResources (Shanghai)'s P/S Mean For Investors?

The large bounce in PharmaResources (Shanghai)'s shares has lifted the company's P/S handsomely. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into PharmaResources (Shanghai) shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 4 warning signs for PharmaResources (Shanghai) (2 shouldn't be ignored!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.