Despite an already strong run, Lionco Pharmaceutical Group Co.,Ltd. (SHSE:603669) shares have been powering on, with a gain of 26% in the last thirty days. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 2.5% over the last year.

Following the firm bounce in price, given around half the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 3.7x, you may consider Lionco Pharmaceutical GroupLtd as a stock to avoid entirely with its 17.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Lionco Pharmaceutical GroupLtd Performed Recently?

As an illustration, revenue has deteriorated at Lionco Pharmaceutical GroupLtd over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

Is There Enough Revenue Growth Forecasted For Lionco Pharmaceutical GroupLtd?

In order to justify its P/S ratio, Lionco Pharmaceutical GroupLtd would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. The last three years don't look nice either as the company has shrunk revenue by 80% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 18% shows it's an unpleasant look.

With this in mind, we find it worrying that Lionco Pharmaceutical GroupLtd's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. 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.

What We Can Learn From Lionco Pharmaceutical GroupLtd's P/S?

The strong share price surge has lead to Lionco Pharmaceutical GroupLtd's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Lionco Pharmaceutical GroupLtd 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. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You always need to take note of risks, for example - Lionco Pharmaceutical GroupLtd has 1 warning sign we think 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.