YiChang HEC ChangJiang Pharmaceutical Co., Ltd. (HKG:1558) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 74% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that YiChang HEC ChangJiang Pharmaceutical's price-to-sales (or "P/S") ratio of 1.2x right now seems quite "middle-of-the-road" compared to the Pharmaceuticals industry in Hong Kong, where the median P/S ratio is around 1.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for YiChang HEC ChangJiang Pharmaceutical

How Has YiChang HEC ChangJiang Pharmaceutical Performed Recently?

With revenue growth that's superior to most other companies of late, YiChang HEC ChangJiang Pharmaceutical has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Is There Some Revenue Growth Forecasted For YiChang HEC ChangJiang Pharmaceutical?

In order to justify its P/S ratio, YiChang HEC ChangJiang Pharmaceutical would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 182%. The latest three year period has also seen a 8.1% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% during the coming year according to the dual analysts following the company. That's shaping up to be materially lower than the 20% growth forecast for the broader industry.

With this information, we find it interesting that YiChang HEC ChangJiang Pharmaceutical is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From YiChang HEC ChangJiang Pharmaceutical's P/S?

YiChang HEC ChangJiang Pharmaceutical appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that YiChang HEC ChangJiang Pharmaceutical's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for YiChang HEC ChangJiang Pharmaceutical with six simple checks.

If you're unsure about the strength of YiChang HEC ChangJiang Pharmaceutical'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.