Simcere Pharmaceutical Group Limited's (HKG:2096) P/S Still Appears To Be Reasonable

Simcere Pharmaceutical Group Limited's (HKG:2096) price-to-sales (or "P/S") ratio of 2.5x may not look like an appealing investment opportunity when you consider close to half the companies in the Pharmaceuticals industry in Hong Kong have P/S ratios below 1.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Simcere Pharmaceutical Group

What Does Simcere Pharmaceutical Group's Recent Performance Look Like?

Simcere Pharmaceutical Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

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

In order to justify its P/S ratio, Simcere Pharmaceutical Group would need to produce impressive growth in excess of 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 9.5%. Still, the latest three year period has seen an excellent 35% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the six analysts watching the company. With the industry only predicted to deliver 10% per annum, the company is positioned for a stronger revenue result.

With this information, we can see why Simcere Pharmaceutical Group is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Simcere Pharmaceutical Group'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.

As we suspected, our examination of Simcere Pharmaceutical Group's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Simcere Pharmaceutical Group with six simple checks.

If these risks are making you reconsider your opinion on Simcere Pharmaceutical 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.