You may think that with a price-to-sales (or "P/S") ratio of 8.2x Guangdong Leadyo IC Testing Co., Ltd. (SHSE:688135) is a stock to potentially avoid, seeing as almost half of all the Semiconductor companies in China have P/S ratios under 6.8x and even P/S lower than 3x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

What Does Guangdong Leadyo IC Testing's P/S Mean For Shareholders?

It looks like revenue growth has deserted Guangdong Leadyo IC Testing recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be a little nervous about the viability of the share price.

How Is Guangdong Leadyo IC Testing's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Guangdong Leadyo IC Testing's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 40% overall rise in revenue, in spite of its uninspiring short-term performance. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

This is in contrast to the rest of the industry, which is expected to grow by 51% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it worrying that Guangdong Leadyo IC Testing's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What We Can Learn From Guangdong Leadyo IC Testing's P/S?

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.

The fact that Guangdong Leadyo IC Testing currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Guangdong Leadyo IC Testing.

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

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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.