When close to half the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3.4x, you may consider Nanjing King-Friend Biochemical Pharmaceutical Co.,Ltd. (SHSE:603707) as a stock to potentially avoid with its 5.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Nanjing King-Friend Biochemical PharmaceuticalLtd Has Been Performing

Nanjing King-Friend Biochemical PharmaceuticalLtd could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Nanjing King-Friend Biochemical PharmaceuticalLtd?

Nanjing King-Friend Biochemical PharmaceuticalLtd'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 3.2%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.6% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 37% during the coming year according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 186%, which is noticeably more attractive.

In light of this, it's alarming that Nanjing King-Friend Biochemical PharmaceuticalLtd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

We've concluded that Nanjing King-Friend Biochemical PharmaceuticalLtd currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Nanjing King-Friend Biochemical PharmaceuticalLtd that you should be aware of.

If these risks are making you reconsider your opinion on Nanjing King-Friend Biochemical PharmaceuticalLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.