Suzhou Novosense Microelectronics Co., Ltd. (SHSE:688052) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 13% over that time.

Since its price has surged higher, Suzhou Novosense Microelectronics' price-to-sales (or "P/S") ratio of 10.5x might make it look like a sell right now compared to the wider Semiconductor industry in China, where around half of the companies have P/S ratios below 7.1x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

What Does Suzhou Novosense Microelectronics' P/S Mean For Shareholders?

Suzhou Novosense Microelectronics certainly has been doing a good job lately as it's been growing revenue more than most other companies. 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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 94% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 36% over the next year. With the industry predicted to deliver 38% growth , the company is positioned for a comparable revenue result.

In light of this, it's curious that Suzhou Novosense Microelectronics' P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

The large bounce in Suzhou Novosense Microelectronics' shares has lifted the company's P/S handsomely. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Analysts are forecasting Suzhou Novosense Microelectronics' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Suzhou Novosense Microelectronics, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Suzhou Novosense Microelectronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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