Beken Corporation (SHSE:603068) shares have continued their recent momentum with a 27% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, Beken's price-to-sales (or "P/S") ratio of 5.7x might still make it look like a buy right now compared to the Semiconductor industry in China, where around half of the companies have P/S ratios above 7.4x and even P/S above 13x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does Beken's P/S Mean For Shareholders?

Beken has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Do Revenue Forecasts Match The Low P/S Ratio?

Beken's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.3% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 28% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 42% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Beken's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Beken's stock price has surged recently, but its but its P/S still remains modest. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Beken confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Beken that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.