Those holding Suzhou Convert Semiconductor CO., LTD. (SHSE:688693) shares would be relieved that the share price has rebounded 33% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, Suzhou Convert Semiconductor may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 10.2x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 6.3x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

How Suzhou Convert Semiconductor Has Been Performing

For instance, Suzhou Convert Semiconductor's receding revenue in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Suzhou Convert Semiconductor'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.

Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's top line. Even so, admirably revenue has lifted 56% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 37% shows it's noticeably less attractive.

With this information, we find it concerning that Suzhou Convert Semiconductor 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. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Suzhou Convert Semiconductor's P/S Mean For Investors?

Shares in Suzhou Convert Semiconductor have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

The fact that Suzhou Convert Semiconductor currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for Suzhou Convert Semiconductor that you need to take into consideration.

If you're unsure about the strength of Suzhou Convert Semiconductor's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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