National Silicon Industry Group Co.,Ltd.'s (SHSE:688126) Share Price Could Signal Some Risk

You may think that with a price-to-sales (or "P/S") ratio of 15.8x National Silicon Industry Group Co.,Ltd. (SHSE:688126) is a stock to avoid completely, seeing as almost half of all the Semiconductor companies in China have P/S ratios under 6.5x and even P/S lower than 3x aren't out of the ordinary. 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 National Silicon Industry GroupLtd

What Does National Silicon Industry GroupLtd's Recent Performance Look Like?

While the industry has experienced revenue growth lately, National Silicon Industry GroupLtd's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For National Silicon Industry GroupLtd?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.4%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 44% 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.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 24% each year over the next three years. That's shaping up to be materially lower than the 63% per year growth forecast for the broader industry.

In light of this, it's alarming that National Silicon Industry GroupLtd's P/S sits above the majority of other companies. 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.

What We Can Learn From National Silicon Industry GroupLtd's P/S?

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 National Silicon Industry GroupLtd, 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for National Silicon Industry GroupLtd with six simple checks will allow you to discover any risks that could be an issue.

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.