ShanXi C&Y Pharmaceutical Group Co., Ltd. (SZSE:300254) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

After such a large drop in price, ShanXi C&Y Pharmaceutical Group's price-to-sales (or "P/S") ratio of 2.2x 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 3x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

How ShanXi C&Y Pharmaceutical Group Has Been Performing

As an illustration, revenue has deteriorated at ShanXi C&Y Pharmaceutical Group over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is ShanXi C&Y Pharmaceutical Group's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as ShanXi C&Y Pharmaceutical Group's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.4%. As a result, revenue from three years ago have also fallen 11% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 35% 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 understand why ShanXi C&Y Pharmaceutical Group's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Bottom Line On ShanXi C&Y Pharmaceutical Group's P/S

ShanXi C&Y Pharmaceutical Group's recently weak share price has pulled its P/S back below other Pharmaceuticals companies. 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.

As we suspected, our examination of ShanXi C&Y Pharmaceutical Group revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about this 1 warning sign we've spotted with ShanXi C&Y Pharmaceutical Group.

If you're unsure about the strength of ShanXi C&Y Pharmaceutical Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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