Tech Semiconductors Co., Ltd. (SZSE:300046) shares have continued their recent momentum with a 37% gain in the last month alone. The annual gain comes to 149% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Tech Semiconductors' price-to-sales (or "P/S") ratio of 30x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 6.8x and even P/S below 3x are quite common. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Tech Semiconductors' P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, Tech Semiconductors' revenue has been unimpressive. Perhaps the market believes that revenue growth will improve markedly over current levels, inflating the P/S ratio. If not, then existing shareholders may be a little nervous about the viability of the share price.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 28% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 43% shows it's an unpleasant look.

With this information, we find it concerning that Tech Semiconductors is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Tech Semiconductors' P/S?

Shares in Tech Semiconductors have seen a strong upwards swing lately, which has really helped boost its P/S figure. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Tech Semiconductors currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Tech Semiconductors (at least 1 which is significant), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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