The Fujian Cosunter Pharmaceutical Co., Ltd. (SZSE:300436) share price has softened a substantial 33% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

In spite of the heavy fall in price, when almost half of the companies in China's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.8x, you may still consider Fujian Cosunter Pharmaceutical as a stock not worth researching with its 6.3x 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 Fujian Cosunter Pharmaceutical Has Been Performing

Revenue has risen firmly for Fujian Cosunter Pharmaceutical recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

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

Retrospectively, the last year delivered an exceptional 25% gain to the company's top line. Revenue has also lifted 26% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 126% shows it's noticeably less attractive.

In light of this, it's alarming that Fujian Cosunter Pharmaceutical's P/S sits above the majority of other companies. 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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Fujian Cosunter Pharmaceutical's P/S?

Fujian Cosunter Pharmaceutical's shares may have suffered, but its P/S remains high. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Fujian Cosunter Pharmaceutical revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 3 warning signs for Fujian Cosunter Pharmaceutical that you need to take into consideration.

If these risks are making you reconsider your opinion on Fujian Cosunter Pharmaceutical, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.