With a median price-to-sales (or "P/S") ratio of close to 7.3x in the Semiconductor industry in China, you could be forgiven for feeling indifferent about Shenzhen Sunmoon Microelectronics Co., Ltd's (SHSE:688699) P/S ratio of 6.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Shenzhen Sunmoon Microelectronics

How Shenzhen Sunmoon Microelectronics Has Been Performing

As an illustration, revenue has deteriorated at Shenzhen Sunmoon Microelectronics over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

Is There Some Revenue Growth Forecasted For Shenzhen Sunmoon Microelectronics?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Shenzhen Sunmoon Microelectronics' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 9.1% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 43% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 39% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Shenzhen Sunmoon Microelectronics' P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

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.

Our examination of Shenzhen Sunmoon Microelectronics revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Before you settle on your opinion, we've discovered 2 warning signs for Shenzhen Sunmoon Microelectronics that you should be aware of.

If you're unsure about the strength of Shenzhen Sunmoon Microelectronics' 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.