Rockchip Electronics Co., Ltd.'s (SHSE:603893) 25% Price Boost Is Out Of Tune With Revenues

Rockchip Electronics Co., Ltd. (SHSE:603893) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 32%.

Following the firm bounce in price, Rockchip Electronics may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 13.1x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 7.4x and even P/S lower than 3x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Rockchip Electronics

What Does Rockchip Electronics' P/S Mean For Shareholders?

Recent times have been advantageous for Rockchip Electronics as its revenues have been rising faster 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 Rockchip Electronics.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Rockchip Electronics would need to produce outstanding growth that's well in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 48%. The latest three year period has also seen a 5.4% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the six analysts following the company. That's shaping up to be materially lower than the 42% growth forecast for the broader industry.

With this information, we find it concerning that Rockchip Electronics is trading at a P/S higher than the industry. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Rockchip Electronics' P/S Mean For Investors?

The strong share price surge has lead to Rockchip Electronics' P/S soaring as well. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Rockchip Electronics, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Rockchip Electronics with six simple checks on some of these key factors.

If you're unsure about the strength of Rockchip Electronics' 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.