Zhejiang Yatai Pharmaceutical Co., Ltd. (SZSE:002370) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 34% over that time.
After such a large jump in price, given close to half the companies operating in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider Zhejiang Yatai Pharmaceutical as a stock to potentially avoid with its 4.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
SZSE:002370 Price to Sales Ratio vs Industry August 16th 2024
What Does Zhejiang Yatai Pharmaceutical's Recent Performance Look Like?
For example, consider that Zhejiang Yatai Pharmaceutical's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zhejiang Yatai Pharmaceutical's earnings, revenue and cash flow.
Do Revenue Forecasts Match The High P/S Ratio?
Zhejiang Yatai Pharmaceutical's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.0% in total over the last three years. 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 17% shows it's an unpleasant look.
In light of this, it's alarming that Zhejiang Yatai Pharmaceutical's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
The Final Word
The large bounce in Zhejiang Yatai Pharmaceutical's shares has lifted the company's P/S handsomely. 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.
We've established that Zhejiang Yatai Pharmaceutical currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.
You always need to take note of risks, for example - Zhejiang Yatai Pharmaceutical has 1 warning sign we think 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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