Why Investors Shouldn't Be Surprised By Zbit Semiconductor, Inc.'s (SHSE:688416) 41% Share Price Surge

Zbit Semiconductor, Inc. (SHSE:688416) shares have continued their recent momentum with a 41% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

After such a large jump in price, Zbit Semiconductor may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 11x, since almost half of all companies in the Semiconductor industry in China have P/S ratios under 7x 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 Zbit Semiconductor

How Zbit Semiconductor Has Been Performing

Zbit Semiconductor could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

Zbit Semiconductor'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.

If we review the last year of revenue growth, the company posted a terrific increase of 17%. Still, revenue has fallen 39% 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 62% during the coming year according to the one analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 49%, which is noticeably less attractive.

With this information, we can see why Zbit Semiconductor is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Zbit Semiconductor's P/S

The strong share price surge has lead to Zbit Semiconductor's 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.

As we suspected, our examination of Zbit Semiconductor's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about this 1 warning sign we've spotted with Zbit Semiconductor.

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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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.