With a price-to-sales (or "P/S") ratio of 22x Monolithic Power Systems, Inc. (NASDAQ:MPWR) may be sending very bearish signals at the moment, given that almost half of all the Semiconductor companies in the United States have P/S ratios under 4.4x and even P/S lower than 2x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

What Does Monolithic Power Systems' P/S Mean For Shareholders?

Monolithic Power Systems hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. 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.

Do Revenue Forecasts Match The High P/S Ratio?

Monolithic Power Systems' 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.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.1%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 96% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 19% per year as estimated by the analysts watching the company. That's shaping up to be materially lower than the 27% per year growth forecast for the broader industry.

With this information, we find it concerning that Monolithic Power Systems is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Monolithic Power Systems' P/S

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Monolithic Power Systems, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

You always need to take note of risks, for example - Monolithic Power Systems has 2 warning signs we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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