Guangdong Leadyo IC Testing Co., Ltd.'s (SHSE:688135) 52% Share Price Surge Not Quite Adding Up

Guangdong Leadyo IC Testing Co., Ltd. (SHSE:688135) shareholders would be excited to see that the share price has had a great month, posting a 52% gain and recovering from prior weakness. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 12% in the last twelve months.

After such a large jump in price, Guangdong Leadyo IC Testing may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 8.2x, since almost half of all companies in the Semiconductor in China have P/S ratios under 6.2x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Guangdong Leadyo IC Testing

How Guangdong Leadyo IC Testing Has Been Performing

The recent revenue growth at Guangdong Leadyo IC Testing would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Guangdong Leadyo IC Testing's earnings, revenue and cash flow.

How Is Guangdong Leadyo IC Testing's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Guangdong Leadyo IC Testing's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 4.1%. Pleasingly, revenue has also lifted 70% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 36% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it concerning that Guangdong Leadyo IC Testing is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Guangdong Leadyo IC Testing's P/S?

Guangdong Leadyo IC Testing's P/S is on the rise since its shares have risen strongly. 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.

The fact that Guangdong Leadyo IC Testing currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Before you settle on your opinion, we've discovered 3 warning signs for Guangdong Leadyo IC Testing (2 shouldn't be ignored!) that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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