There's Reason For Concern Over Motorcomm Electronic Technology Co., Ltd.'s (SHSE:688515) Massive 31% Price Jump

Despite an already strong run, Motorcomm Electronic Technology Co., Ltd. (SHSE:688515) shares have been powering on, with a gain of 31% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 14% is also fairly reasonable.

After such a large jump in price, Motorcomm Electronic Technology may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 23.7x, 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Motorcomm Electronic Technology

How Has Motorcomm Electronic Technology Performed Recently?

Recent times have been advantageous for Motorcomm Electronic Technology as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Motorcomm Electronic Technology?

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

Retrospectively, the last year delivered an exceptional 40% gain to the company's top line. Pleasingly, revenue has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 52% over the next year. With the industry predicted to deliver 49% growth , the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Motorcomm Electronic Technology's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Motorcomm Electronic Technology's P/S?

Motorcomm Electronic Technology'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.

Given Motorcomm Electronic Technology's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for Motorcomm Electronic Technology (1 can't be ignored!) that you need to take into consideration.

If these risks are making you reconsider your opinion on Motorcomm Electronic Technology, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.