Rockchip Electronics Co., Ltd. (SHSE:603893) shares have continued their recent momentum with a 32% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 80%.

Since its price has surged higher, Rockchip Electronics may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 16.3x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7x and even P/S lower than 3x 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 so lofty.

What Does Rockchip Electronics' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Rockchip Electronics has been doing relatively well. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Is There Enough Revenue Growth Forecasted For Rockchip Electronics?

Rockchip Electronics' 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 an exceptional 48% gain to the company's top line. The latest three year period has also seen a 5.4% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 22% as estimated by the five analysts watching the company. That's shaping up to be materially lower than the 48% growth forecast for the broader industry.

With this information, we find it concerning that Rockchip Electronics is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Final Word

Rockchip Electronics' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've concluded that Rockchip Electronics currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Rockchip Electronics with six simple checks on some of these key factors.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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