Despite an already strong run, Hangzhou TianMuShan Pharmaceutical Enterprise Co.,Ltd (SHSE:600671) shares have been powering on, with a gain of 25% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Hangzhou TianMuShan Pharmaceutical EnterpriseLtd is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12x, considering almost half the companies in China's Pharmaceuticals industry have P/S ratios below 3.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Hangzhou TianMuShan Pharmaceutical EnterpriseLtd

How Has Hangzhou TianMuShan Pharmaceutical EnterpriseLtd Performed Recently?

For example, consider that Hangzhou TianMuShan Pharmaceutical EnterpriseLtd's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Hangzhou TianMuShan Pharmaceutical EnterpriseLtd's Revenue Growth Trending?

Hangzhou TianMuShan Pharmaceutical EnterpriseLtd'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.

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 22%. As a result, revenue from three years ago have also fallen 62% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 269% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Hangzhou TianMuShan Pharmaceutical EnterpriseLtd is trading at a P/S higher than the industry. 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Hangzhou TianMuShan Pharmaceutical EnterpriseLtd's P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Hangzhou TianMuShan Pharmaceutical EnterpriseLtd currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Hangzhou TianMuShan Pharmaceutical EnterpriseLtd that you should be aware of.

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.