When close to half the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3.7x, you may consider Shanghai Allist Pharmaceuticals Co., Ltd. (SHSE:688578) as a stock to avoid entirely with its 11.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Shanghai Allist Pharmaceuticals

What Does Shanghai Allist Pharmaceuticals' P/S Mean For Shareholders?

Shanghai Allist Pharmaceuticals certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Shanghai Allist Pharmaceuticals?

In order to justify its P/S ratio, Shanghai Allist Pharmaceuticals would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 189% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 42% over the next year. Meanwhile, the rest of the industry is forecast to expand by 40%, which is not materially different.

With this in consideration, we find it intriguing that Shanghai Allist Pharmaceuticals' P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What We Can Learn From Shanghai Allist Pharmaceuticals' P/S?

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.

Analysts are forecasting Shanghai Allist Pharmaceuticals' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Shanghai Allist Pharmaceuticals with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on Shanghai Allist Pharmaceuticals, 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.