Little Excitement Around Tongwei Co.,Ltd's (SHSE:600438) Revenues

You may think that with a price-to-sales (or "P/S") ratio of 1x Tongwei Co.,Ltd (SHSE:600438) is definitely a stock worth checking out, seeing as almost half of all the Semiconductor companies in China have P/S ratios greater than 7.3x and even P/S above 13x 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 so limited.

See our latest analysis for TongweiLtd

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

While the industry has experienced revenue growth lately, TongweiLtd's revenue has gone into reverse gear, which is not great. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on TongweiLtd.

Is There Any Revenue Growth Forecasted For TongweiLtd?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 37%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 62% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 21% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 58% growth each year, the company is positioned for a weaker revenue result.

In light of this, it's understandable that TongweiLtd's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that TongweiLtd maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

You should always think about risks. Case in point, we've spotted 2 warning signs for TongweiLtd you should be aware of.

If these risks are making you reconsider your opinion on TongweiLtd, 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.