Unfortunately for some shareholders, the Nanjing Hicin Pharmaceutical Co., Ltd. (SZSE:300584) share price has dived 25% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 39% share price drop.

Although its price has dipped substantially, you could still be forgiven for thinking Nanjing Hicin Pharmaceutical is a stock not worth researching with a price-to-sales ratios (or "P/S") of 4x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Nanjing Hicin Pharmaceutical Has Been Performing

Revenue has risen at a steady rate over the last year for Nanjing Hicin Pharmaceutical, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Nanjing Hicin Pharmaceutical?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 4.2% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 33% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Nanjing Hicin Pharmaceutical's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Nanjing Hicin Pharmaceutical's P/S

There's still some elevation in Nanjing Hicin Pharmaceutical's P/S, even if the same can't be said for its share price recently. 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.

Our examination of Nanjing Hicin Pharmaceutical revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Nanjing Hicin Pharmaceutical, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Nanjing Hicin Pharmaceutical, 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.