Dioo Microcircuits Co., Ltd. Jiangsu's (SHSE:688381) 44% Price Boost Is Out Of Tune With Revenues

Dioo Microcircuits Co., Ltd. Jiangsu (SHSE:688381) shareholders would be excited to see that the share price has had a great month, posting a 44% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 43%.

Since its price has surged higher, Dioo Microcircuits Jiangsu may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 11.9x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7.1x and even P/S lower than 3x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Dioo Microcircuits Jiangsu

How Dioo Microcircuits Jiangsu Has Been Performing

Dioo Microcircuits Jiangsu certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Dioo Microcircuits Jiangsu will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Dioo Microcircuits Jiangsu's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 25% gain to the company's top line. Still, revenue has fallen 2.4% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 38% during the coming year according to the sole analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 49%, which is noticeably more attractive.

With this information, we find it concerning that Dioo Microcircuits Jiangsu is trading at a P/S higher than the industry. 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. 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.

The Bottom Line On Dioo Microcircuits Jiangsu's P/S

Dioo Microcircuits Jiangsu's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It comes as a surprise to see Dioo Microcircuits Jiangsu trade at such a high P/S given the revenue forecasts look less than stellar. 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.

Having said that, be aware Dioo Microcircuits Jiangsu is showing 4 warning signs in our investment analysis, and 1 of those is significant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.