Sunshine Guojian Pharmaceutical (Shanghai) Co., Ltd (SHSE:688336) shareholders are no doubt pleased to see that the share price has bounced 29% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 54%.

Following the firm bounce in price, when almost half of the companies in China's Biotechs industry have price-to-sales ratios (or "P/S") below 7.5x, you may consider Sunshine Guojian Pharmaceutical (Shanghai) as a stock not worth researching with its 14.3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

How Sunshine Guojian Pharmaceutical (Shanghai) Has Been Performing

With revenue growth that's superior to most other companies of late, Sunshine Guojian Pharmaceutical (Shanghai) has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Sunshine Guojian Pharmaceutical (Shanghai)'s to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 55% overall rise in revenue, aided by its 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 one analyst covering the company suggest revenue should grow by 8.0% over the next year. Meanwhile, the rest of the industry is forecast to expand by 163%, which is noticeably more attractive.

With this information, we find it concerning that Sunshine Guojian Pharmaceutical (Shanghai) is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Sunshine Guojian Pharmaceutical (Shanghai)'s P/S

Sunshine Guojian Pharmaceutical (Shanghai)'s P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It comes as a surprise to see Sunshine Guojian Pharmaceutical (Shanghai) trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Sunshine Guojian Pharmaceutical (Shanghai) that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.