When close to half the companies in the Pharmaceuticals industry in Hong Kong have price-to-sales ratios (or "P/S") below 1.2x, you may consider Sino Biopharmaceutical Limited (HKG:1177) as a stock to potentially avoid with its 1.7x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Sino Biopharmaceutical

What Does Sino Biopharmaceutical's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Sino Biopharmaceutical has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Sino Biopharmaceutical?

The only time you'd be truly comfortable seeing a P/S as high as Sino Biopharmaceutical's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 4.2% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 19% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 6.9% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 10% per annum growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Sino Biopharmaceutical's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Sino Biopharmaceutical's P/S

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Sino Biopharmaceutical, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Sino Biopharmaceutical that 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.