Modern Chinese Medicine Group Co., Ltd. (HKG:1643) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. 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.

Even after such a large jump in price, considering around half the companies operating in Hong Kong's Pharmaceuticals industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider Modern Chinese Medicine Group as an solid investment opportunity with its 0.9x 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 limited.

What Does Modern Chinese Medicine Group's P/S Mean For Shareholders?

For example, consider that Modern Chinese Medicine Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

How Is Modern Chinese Medicine Group's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Modern Chinese Medicine Group's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 37%. This means it has also seen a slide in revenue over the longer-term as revenue is down 25% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 8.9% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we are not surprised that Modern Chinese Medicine Group is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Modern Chinese Medicine Group's P/S

Modern Chinese Medicine Group's stock price has surged recently, but its but its P/S still remains modest. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Modern Chinese Medicine Group maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Modern Chinese Medicine Group (2 are concerning!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Modern Chinese Medicine Group, 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.