What Rockchip Electronics Co., Ltd.'s (SHSE:603893) 41% Share Price Gain Is Not Telling You

Despite an already strong run, Rockchip Electronics Co., Ltd. (SHSE:603893) shares have been powering on, with a gain of 41% in the last thirty days. The last 30 days bring the annual gain to a very sharp 82%.

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 16.9x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 7.2x 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.

See our latest analysis for Rockchip Electronics

How Has Rockchip Electronics Performed Recently?

With revenue growth that's superior to most other companies of late, Rockchip Electronics has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Rockchip Electronics' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Rockchip Electronics' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Rockchip Electronics' is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 48% last year. Revenue has also lifted 5.4% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 22% during the coming year according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 49%, which is noticeably more attractive.

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.

The Key Takeaway

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

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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

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 strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.