Those holding Qinghai Spring Medicinal Resources Technology Co., Ltd. (SHSE:600381) 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. But the last month did very little to improve the 67% share price decline over the last year.

After such a large jump in price, you could be forgiven for thinking Qinghai Spring Medicinal Resources Technology is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.3x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 2.9x. 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 Qinghai Spring Medicinal Resources Technology's P/S Mean For Shareholders?

Qinghai Spring Medicinal Resources Technology certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Qinghai Spring Medicinal Resources Technology's to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 71%. The latest three year period has also seen an excellent 84% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 18%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we can see why Qinghai Spring Medicinal Resources Technology is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Qinghai Spring Medicinal Resources Technology's P/S?

The strong share price surge has lead to Qinghai Spring Medicinal Resources Technology's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Qinghai Spring Medicinal Resources Technology maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Qinghai Spring Medicinal Resources Technology (1 is concerning) 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com