Shanghai Fudan Forward S&T Co., Ltd (SHSE:600624) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.

Following the firm bounce in price, given close to half the companies operating in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Shanghai Fudan Forward S&T as a stock to potentially avoid with its 4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Shanghai Fudan Forward S&T Has Been Performing

As an illustration, revenue has deteriorated at Shanghai Fudan Forward S&T over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Shanghai Fudan Forward S&T's Revenue Growth Trending?

Shanghai Fudan Forward S&T's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 10%. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 17% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Shanghai Fudan Forward S&T'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Shanghai Fudan Forward S&T's P/S Mean For Investors?

Shanghai Fudan Forward S&T shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Shanghai Fudan Forward S&T currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It is also worth noting that we have found 2 warning signs for Shanghai Fudan Forward S&T (1 makes us a bit uncomfortable!) that you need to take into consideration.

If you're unsure about the strength of Shanghai Fudan Forward S&T'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com