VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 52% share price drop in the last twelve months.

Following the firm bounce in price, VeriSilicon Microelectronics (Shanghai) may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 7.9x, since almost half of all companies in the Semiconductor in China have P/S ratios under 5.6x and even P/S lower than 2x are not unusual. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for VeriSilicon Microelectronics (Shanghai)

How VeriSilicon Microelectronics (Shanghai) Has Been Performing

VeriSilicon Microelectronics (Shanghai) hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think VeriSilicon Microelectronics (Shanghai)'s future stacks up against the industry? In that case, our free report is a great place to start.

How Is VeriSilicon Microelectronics (Shanghai)'s Revenue Growth Trending?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 20%. Still, the latest three year period has seen an excellent 38% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 37% during the coming year according to the seven analysts following the company. With the industry predicted to deliver 36% growth , the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that VeriSilicon Microelectronics (Shanghai)'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.

The Bottom Line On VeriSilicon Microelectronics (Shanghai)'s P/S

VeriSilicon Microelectronics (Shanghai) shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given VeriSilicon Microelectronics (Shanghai)'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. A positive change is needed in order to justify the current price-to-sales ratio.

Plus, you should also learn about this 1 warning sign we've spotted with VeriSilicon Microelectronics (Shanghai).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com