It's not a stretch to say that Shanghai Awinic Technology Co.,Ltd.'s (SHSE:688798) price-to-sales (or "P/S") ratio of 5.3x right now seems quite "middle-of-the-road" for companies in the Semiconductor industry in China, where the median P/S ratio is around 5.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

How Has Shanghai Awinic TechnologyLtd Performed Recently?

Shanghai Awinic TechnologyLtd certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Is There Some Revenue Growth Forecasted For Shanghai Awinic TechnologyLtd?

The only time you'd be comfortable seeing a P/S like Shanghai Awinic TechnologyLtd's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. The latest three year period has also seen an excellent 76% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 21% per annum as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 28% per year, which is noticeably more attractive.

In light of this, it's curious that Shanghai Awinic TechnologyLtd's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that Shanghai Awinic TechnologyLtd's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Shanghai Awinic TechnologyLtd that you need to take into consideration.

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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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.