To the annoyance of some shareholders, Suzhou Convert Semiconductor CO., LTD. (SHSE:688693) shares are down a considerable 32% in the last month, which continues a horrid run for the company. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, Suzhou Convert Semiconductor may still be sending sell signals at present with a price-to-sales (or "P/S") ratio of 7.5x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 5.7x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

How Has Suzhou Convert Semiconductor Performed Recently?

As an illustration, revenue has deteriorated at Suzhou Convert Semiconductor over the last year, which is not ideal at all. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

How Is Suzhou Convert Semiconductor's Revenue Growth Trending?

In order to justify its P/S ratio, Suzhou Convert Semiconductor 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 9.2%. Still, the latest three year period has seen an excellent 56% overall rise in revenue, in spite of its unsatisfying short-term performance. 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 that to the industry, which is predicted to deliver 34% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Suzhou Convert Semiconductor's P/S exceeds that of its industry peers. 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.

The Final Word

Despite the recent share price weakness, Suzhou Convert Semiconductor's P/S remains higher than most other companies in the industry. 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.

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. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Suzhou Convert Semiconductor (1 can't be ignored!) that you should be aware of before investing here.

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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