Inner Mongolia Furui Medical Science Co., Ltd.'s (SZSE:300049) price-to-sales (or "P/S") ratio of 10.7x may look like a poor investment opportunity when you consider close to half the companies in the Pharmaceuticals industry in China have P/S ratios below 3.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Inner Mongolia Furui Medical Science

What Does Inner Mongolia Furui Medical Science's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Inner Mongolia Furui Medical Science has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Inner Mongolia Furui Medical Science?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Inner Mongolia Furui Medical Science's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.8%. Pleasingly, revenue has also lifted 34% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 38% over the next year. That's shaping up to be similar to the 40% growth forecast for the broader industry.

In light of this, it's curious that Inner Mongolia Furui Medical Science's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Inner Mongolia Furui Medical Science's P/S?

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.

Analysts are forecasting Inner Mongolia Furui Medical Science's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Inner Mongolia Furui Medical Science that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.