Optimistic Investors Push Shenzhen Goodix Technology Co., Ltd. (SHSE:603160) Shares Up 42% But Growth Is Lacking

Shenzhen Goodix Technology Co., Ltd. (SHSE:603160) shareholders would be excited to see that the share price has had a great month, posting a 42% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 9.7% isn't as impressive.

Since its price has surged higher, Shenzhen Goodix Technology may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 8.1x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 6.1x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Shenzhen Goodix Technology

How Has Shenzhen Goodix Technology Performed Recently?

Shenzhen Goodix Technology certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Shenzhen Goodix Technology?

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

Retrospectively, the last year delivered an exceptional 30% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 29% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 14% as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 37% growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Shenzhen Goodix Technology's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Shenzhen Goodix Technology's P/S

Shenzhen Goodix Technology's P/S is on the rise since its shares have risen strongly. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've concluded that Shenzhen Goodix Technology currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Shenzhen Goodix Technology with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.