Halo Microelectronics Co., Ltd.'s (SHSE:688173) Shareholders Might Be Looking For Exit

With a price-to-sales (or "P/S") ratio of 10.4x Halo Microelectronics Co., Ltd. (SHSE:688173) may be sending bearish signals at the moment, given that almost half of all Semiconductor companies 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 high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Halo Microelectronics

What Does Halo Microelectronics' P/S Mean For Shareholders?

Halo Microelectronics certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Halo Microelectronics, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Halo Microelectronics' Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 36% gain to the company's top line. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 49% shows it's noticeably less attractive.

In light of this, it's alarming that Halo Microelectronics' P/S sits above the majority of other companies. 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.

The Final Word

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.

Our examination of Halo Microelectronics revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. If recent medium-term revenue trends continue, it will place 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 2 warning signs for Halo Microelectronics (of which 1 doesn't sit too well with us!) you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.