North China Pharmaceutical Company.Ltd's (SHSE:600812) price-to-sales (or "P/S") ratio of 1x might make it look like a strong buy right now compared to the Pharmaceuticals industry in China, where around half of the companies have P/S ratios above 3.6x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

What Does North China Pharmaceutical Company.Ltd's P/S Mean For Shareholders?

For instance, North China Pharmaceutical Company.Ltd's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on North China Pharmaceutical Company.Ltd will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

How Is North China Pharmaceutical Company.Ltd's Revenue Growth Trending?

North China Pharmaceutical Company.Ltd's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 8.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 8.6% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 213% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why North China Pharmaceutical Company.Ltd's P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. 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 North China Pharmaceutical Company.Ltd's P/S

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 North China Pharmaceutical Company.Ltd 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.

Before you take the next step, you should know about the 2 warning signs for North China Pharmaceutical Company.Ltd (1 is concerning!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.