With a price-to-sales (or "P/S") ratio of 1.4x Tongfu Microelectronics Co.,Ltd (SZSE:002156) may be sending very bullish signals at the moment, given that almost half of all the Semiconductor companies in China have P/S ratios greater than 6.3x and even P/S higher than 12x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

What Does Tongfu MicroelectronicsLtd's Recent Performance Look Like?

Tongfu MicroelectronicsLtd could be doing better as it's been growing revenue less than most other companies lately. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

How Is Tongfu MicroelectronicsLtd's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Tongfu MicroelectronicsLtd's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 7.7%. Pleasingly, revenue has also lifted 78% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the eleven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 37%, which is noticeably more attractive.

With this in consideration, its clear as to why Tongfu MicroelectronicsLtd's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Tongfu MicroelectronicsLtd's P/S

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.

As we suspected, our examination of Tongfu MicroelectronicsLtd's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for Tongfu MicroelectronicsLtd that we have uncovered.

If you're unsure about the strength of Tongfu MicroelectronicsLtd's 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.