There wouldn't be many who think Giga Device Semiconductor Inc.'s (SHSE:603986) price-to-sales (or "P/S") ratio of 8x is worth a mention when the median P/S for the Semiconductor industry in China is similar at about 6.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Giga Device Semiconductor

What Does Giga Device Semiconductor's Recent Performance Look Like?

Giga Device Semiconductor could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Is There Some Revenue Growth Forecasted For Giga Device Semiconductor?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Giga Device Semiconductor's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 36% decrease to the company's top line. Still, the latest three year period has seen an excellent 38% 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 21% per annum as estimated by the analysts watching the company. With the industry predicted to deliver 30% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's curious that Giga Device Semiconductor's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that Giga Device Semiconductor's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Giga Device Semiconductor you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.