Optimistic Investors Push Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) Shares Up 54% But Growth Is Lacking

Advanced Micro-Fabrication Equipment Inc. China (SHSE:688012) shares have had a really impressive month, gaining 54% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

After such a large jump in price, Advanced Micro-Fabrication Equipment China's price-to-sales (or "P/S") ratio of 17x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 6.2x and even P/S below 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Advanced Micro-Fabrication Equipment China

How Has Advanced Micro-Fabrication Equipment China Performed Recently?

With revenue growth that's superior to most other companies of late, Advanced Micro-Fabrication Equipment China has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Advanced Micro-Fabrication Equipment China's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

Advanced Micro-Fabrication Equipment China's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 36% gain to the company's top line. The latest three year period has also seen an excellent 173% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 32% each year as estimated by the analysts watching the company. With the industry predicted to deliver 40% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Advanced Micro-Fabrication Equipment China is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Advanced Micro-Fabrication Equipment China's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Advanced Micro-Fabrication Equipment China, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Advanced Micro-Fabrication Equipment China (of which 2 are potentially serious!) you should know about.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.