Despite an already strong run, Tonghua Golden-Horse Pharmaceutical Industry Co,Ltd (SZSE:000766) shares have been powering on, with a gain of 40% in the last thirty days. The last month tops off a massive increase of 245% in the last year.

After such a large jump in price, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.9x, you may consider Tonghua Golden-Horse Pharmaceutical Industry CoLtd as a stock not worth researching with its 13.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Tonghua Golden-Horse Pharmaceutical Industry CoLtd

What Does Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Recent Performance Look Like?

The recent revenue growth at Tonghua Golden-Horse Pharmaceutical Industry CoLtd would have to be considered satisfactory if not spectacular. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors' willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.8% last year. Revenue has also lifted 12% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 41% shows it's noticeably less attractive.

With this information, we find it concerning that Tonghua Golden-Horse Pharmaceutical Industry CoLtd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Tonghua Golden-Horse Pharmaceutical Industry CoLtd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you take the next step, you should know about the 2 warning signs for Tonghua Golden-Horse Pharmaceutical Industry CoLtd that we have uncovered.

If you're unsure about the strength of Tonghua Golden-Horse Pharmaceutical Industry CoLtd'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.