As a traditional Chinese medicine preparation, Compound Sihuang External Lotion shows unique advantages in the treatment of various clinical diseases, especially in infectious wounds, gouty ulcers, acute gouty arthritis, postoperative care of finger replantation, and contact dermatitis caused by PICC catheterization, which has attracted extensive attention. Since 2011, multiple studies have demonstrated that Compound Sihuang External Lotion can not only effectively improve wound conditions and promote tissue growth, reduce pain and swelling, but also significantly decrease the levels of inflammatory markers such as C-reactive protein (CRP), interleukin-6 (IL-6), and tumor necrosis factor-α (TNF-α), exerting positive effects on improving therapeutic efficacy. In addition, combined with other therapies such as bloodletting puncture, auricular point pressing with beans, and vacuum sealing drainage (VSD), Compound Sihuang External Lotion further enhances its efficacy in wound repair and inflammation control. However, despite the remarkable progress in clinical application, further research is still needed on its specific mechanism of action, optimal concentration, and dosage form modification to provide a more scientific and rational basis for clinical use. This review aims to comprehensively summarize the application effects and possible mechanisms of Compound Sihuang External Lotion in the treatment of different diseases, providing references for subsequent research and clinical practice.