Those holding Tonghua Golden-Horse Pharmaceutical Industry Co,Ltd (SZSE:000766) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. The annual gain comes to 229% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Tonghua Golden-Horse Pharmaceutical Industry CoLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 11x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S Mean For Shareholders?

The recent revenue growth at Tonghua Golden-Horse Pharmaceutical Industry CoLtd would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

How Is Tonghua Golden-Horse Pharmaceutical Industry CoLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Tonghua Golden-Horse Pharmaceutical Industry CoLtd would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 3.8%. The latest three year period has also seen a 12% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 45% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S Mean For Investors?

Tonghua Golden-Horse Pharmaceutical Industry CoLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Tonghua Golden-Horse Pharmaceutical Industry CoLtd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Having said that, be aware Tonghua Golden-Horse Pharmaceutical Industry CoLtd is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Tonghua Golden-Horse Pharmaceutical Industry CoLtd'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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