Primarius Technologies Co., Ltd.'s (SHSE:688206) 26% Share Price Surge Not Quite Adding Up

Primarius Technologies Co., Ltd. (SHSE:688206) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 41% over that time.

Since its price has surged higher, Primarius Technologies may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 23.5x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 6.6x 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 Primarius Technologies

How Primarius Technologies Has Been Performing

Primarius Technologies' revenue growth of late has been pretty similar to most other companies. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Primarius Technologies.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 18% last year. The latest three year period has also seen an excellent 139% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 58% over the next year. Meanwhile, the rest of the industry is forecast to expand by 20,706%, which is noticeably more attractive.

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

What Does Primarius Technologies' P/S Mean For Investors?

The strong share price surge has lead to Primarius Technologies' P/S soaring as well. 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 Primarius Technologies, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Primarius Technologies with six simple checks.

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.

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.