Landfar Bio-medicine Co., Ltd (SZSE:000504) shares have continued their recent momentum with a 30% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.6% in the last twelve months.

Since its price has surged higher, when almost half of the companies in China's Biotechs industry have price-to-sales ratios (or "P/S") below 7.9x, you may consider Landfar Bio-medicine as a stock not worth researching with its 26.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Landfar Bio-medicine Has Been Performing

For example, consider that Landfar Bio-medicine's financial performance has been poor lately as its revenue has been in decline. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

What Are Revenue Growth Metrics Telling Us About The High P/S?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Landfar Bio-medicine's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 25% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 33% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 238% 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 Landfar Bio-medicine'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 Landfar Bio-medicine's P/S

The strong share price surge has lead to Landfar Bio-medicine's P/S soaring as well. 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.

We've established that Landfar Bio-medicine currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 3 warning signs for Landfar Bio-medicine (2 shouldn't be ignored!) that we have uncovered.

If you're unsure about the strength of Landfar Bio-medicine'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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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.