The Wanbangde Pharmaceutical Holding Group Co., Ltd. (SZSE:002082) share price has fared very poorly over the last month, falling by a substantial 28%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 50% in that time.

After such a large drop in price, Wanbangde Pharmaceutical Holding Group may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.8x, since almost half of all companies in the Pharmaceuticals industry in China have P/S ratios greater than 3x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How Has Wanbangde Pharmaceutical Holding Group Performed Recently?

For example, consider that Wanbangde Pharmaceutical Holding Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Wanbangde Pharmaceutical Holding Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Do Revenue Forecasts Match The Low P/S Ratio?

Wanbangde Pharmaceutical Holding Group's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. As a result, revenue from three years ago have also fallen 89% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 35% shows it's an unpleasant look.

With this in mind, we understand why Wanbangde Pharmaceutical Holding Group's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

Wanbangde Pharmaceutical Holding Group's P/S has taken a dip along with its share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Wanbangde Pharmaceutical Holding Group confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Wanbangde Pharmaceutical Holding Group that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.