When you see that almost half of the companies in the Pharmaceuticals industry in China have price-to-sales ratios (or "P/S") below 3.7x, Sichuan Biokin Pharmaceutical Co.,Ltd. (SHSE:688506) looks to be giving off strong sell signals with its 12.5x 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 Has Sichuan Biokin PharmaceuticalLtd Performed Recently?

With revenue growth that's superior to most other companies of late, Sichuan Biokin PharmaceuticalLtd has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Sichuan Biokin PharmaceuticalLtd's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 43% as estimated by the dual analysts watching the company. With the industry predicted to deliver 229% growth, that's a disappointing outcome.

With this in mind, we find it intriguing that Sichuan Biokin PharmaceuticalLtd's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What Does Sichuan Biokin PharmaceuticalLtd's P/S Mean For Investors?

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.

For a company with revenues that are set to decline in the context of a growing industry, Sichuan Biokin PharmaceuticalLtd's P/S is much higher than we would've anticipated. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

Before you take the next step, you should know about the 2 warning signs for Sichuan Biokin PharmaceuticalLtd (1 can't be ignored!) that we have uncovered.

If you're unsure about the strength of Sichuan Biokin PharmaceuticalLtd'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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