When close to half the companies in the Semiconductor industry in China have price-to-sales ratios (or "P/S") below 8x, you may consider Hygon Information Technology Co., Ltd. (SHSE:688041) as a stock to avoid entirely with its 32x P/S ratio. 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.
Check out our latest analysis for Hygon Information Technology
How Has Hygon Information Technology Performed Recently?
Recent times haven't been great for Hygon Information Technology as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Hygon Information Technology's future stacks up against the industry? In that case, our free report is a great place to start.How Is Hygon Information Technology's Revenue Growth Trending?
In order to justify its P/S ratio, Hygon Information Technology would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. While this performance is only fair, the company was still able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Turning to the outlook, the next year should generate growth of 50% as estimated by the nine analysts watching the company. With the industry only predicted to deliver 40%, the company is positioned for a stronger revenue result.
With this information, we can see why Hygon Information Technology is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
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.
As we suspected, our examination of Hygon Information Technology's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Hygon Information Technology that you should be aware of.
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.
