What Hangzhou SDIC Microelectronics Inc.'s (SHSE:688130) 31% Share Price Gain Is Not Telling You

Hangzhou SDIC Microelectronics Inc. (SHSE:688130) shares have continued their recent momentum with a 31% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 16% is also fairly reasonable.

After such a large jump in price, Hangzhou SDIC Microelectronics may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 23.2x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 7.3x 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 Hangzhou SDIC Microelectronics

How Has Hangzhou SDIC Microelectronics Performed Recently?

Revenue has risen firmly for Hangzhou SDIC Microelectronics recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Hangzhou SDIC Microelectronics will help you shine a light on its historical performance.

How Is Hangzhou SDIC Microelectronics' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hangzhou SDIC Microelectronics' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 9.6%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 25% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 49% shows it's an unpleasant look.

In light of this, it's alarming that Hangzhou SDIC Microelectronics' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Hangzhou SDIC Microelectronics' P/S?

The strong share price surge has lead to Hangzhou SDIC Microelectronics' 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.

We've established that Hangzhou SDIC Microelectronics currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hangzhou SDIC Microelectronics that you should be aware of.

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.