Zhejiang Tianyu Pharmaceutical Co., Ltd.'s (SZSE:300702) price-to-sales (or "P/S") ratio of 2.9x might make it look like a buy right now compared to the Pharmaceuticals industry in China, where around half of the companies have P/S ratios above 3.8x and even P/S above 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Zhejiang Tianyu Pharmaceutical

What Does Zhejiang Tianyu Pharmaceutical's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Zhejiang Tianyu Pharmaceutical's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

How Is Zhejiang Tianyu Pharmaceutical's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Zhejiang Tianyu Pharmaceutical's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.0% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 3.3% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 19% over the next year. Meanwhile, the rest of the industry is forecast to expand by 40%, which is noticeably more attractive.

In light of this, it's understandable that Zhejiang Tianyu Pharmaceutical's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Zhejiang Tianyu Pharmaceutical's P/S

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.

As expected, our analysis of Zhejiang Tianyu Pharmaceutical's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Zhejiang Tianyu Pharmaceutical with six simple checks on some of these key factors.

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.