The Allwinnertech Technology Co.,Ltd. (SZSE:300458) share price has done very well over the last month, posting an excellent gain of 29%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 11% over that time.

Although its price has surged higher, it's still not a stretch to say that Allwinnertech TechnologyLtd's price-to-sales (or "P/S") ratio of 6.7x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in China, where the median P/S ratio is around 5.8x. 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.

How Allwinnertech TechnologyLtd Has Been Performing

Recent times have been advantageous for Allwinnertech TechnologyLtd as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Allwinnertech TechnologyLtd would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 38%. As a result, it also grew revenue by 5.7% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 26% during the coming year according to the two analysts following the company. That's shaping up to be materially lower than the 35% growth forecast for the broader industry.

With this in mind, we find it intriguing that Allwinnertech TechnologyLtd's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Allwinnertech TechnologyLtd's P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look at the analysts forecasts of Allwinnertech TechnologyLtd's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Having said that, be aware Allwinnertech TechnologyLtd is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Allwinnertech TechnologyLtd'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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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.

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