Shaanxi Kanghui Pharmaceutical Co., Ltd. (SHSE:603139) shareholders have had their patience rewarded with a 28% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 21% in the last twelve months.

In spite of the firm bounce in price, Shaanxi Kanghui Pharmaceutical may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.7x, considering almost half of all companies in the Pharmaceuticals industry in China have P/S ratios greater than 3.8x and even P/S higher than 8x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

How Has Shaanxi Kanghui Pharmaceutical Performed Recently?

The recent revenue growth at Shaanxi Kanghui Pharmaceutical would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

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

In order to justify its P/S ratio, Shaanxi Kanghui Pharmaceutical would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 2.8% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 33% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 223% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Shaanxi Kanghui Pharmaceutical's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

Despite Shaanxi Kanghui Pharmaceutical's share price climbing recently, its P/S still lags most other companies. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Shaanxi Kanghui Pharmaceutical revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 2 warning signs we've spotted with Shaanxi Kanghui Pharmaceutical.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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