Optimistic Investors Push VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) Shares Up 35% But Growth Is Lacking

The VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) share price has done very well over the last month, posting an excellent gain of 35%. Looking back a bit further, it's encouraging to see the stock is up 70% in the last year.

Since its price has surged higher, VeriSilicon Microelectronics (Shanghai)'s price-to-sales (or "P/S") ratio of 15.9x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 7.6x and even P/S below 3x are quite common. 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 VeriSilicon Microelectronics (Shanghai)

How Has VeriSilicon Microelectronics (Shanghai) Performed Recently?

While the industry has experienced revenue growth lately, VeriSilicon Microelectronics (Shanghai)'s revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on VeriSilicon Microelectronics (Shanghai) will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/S as steep as VeriSilicon Microelectronics (Shanghai)'s is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 13%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 13% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 38% as estimated by the six analysts watching the company. That's shaping up to be materially lower than the 52% growth forecast for the broader industry.

In light of this, it's alarming that VeriSilicon Microelectronics (Shanghai)'s P/S sits above the majority of other companies. 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 Final Word

VeriSilicon Microelectronics (Shanghai)'s P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've concluded that VeriSilicon Microelectronics (Shanghai) currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. 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.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for VeriSilicon Microelectronics (Shanghai) that you should be aware of.

If you're unsure about the strength of VeriSilicon Microelectronics (Shanghai)'s business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.