VeriSilicon Microelectronics (Shanghai) Co., Ltd.'s (SHSE:688521) 37% Price Boost Is Out Of Tune With Revenues

VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) shares have continued their recent momentum with a 37% gain in the last month alone. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 7.3% in the last twelve months.

After such a large jump in price, VeriSilicon Microelectronics (Shanghai)'s price-to-sales (or "P/S") ratio of 12.2x 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 7.7x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for VeriSilicon Microelectronics (Shanghai)

What Does VeriSilicon Microelectronics (Shanghai)'s P/S Mean For Shareholders?

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. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. 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.

Is There Enough Revenue Growth Forecasted For VeriSilicon Microelectronics (Shanghai)?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like VeriSilicon Microelectronics (Shanghai)'s to be considered reasonable.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 39% over the next year. With the industry predicted to deliver 43% growth , the company is positioned for a comparable revenue result.

With this information, we find it interesting that VeriSilicon Microelectronics (Shanghai) is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does VeriSilicon Microelectronics (Shanghai)'s P/S Mean For Investors?

Shares in VeriSilicon Microelectronics (Shanghai) have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that VeriSilicon Microelectronics (Shanghai) currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

You always need to take note of risks, for example - VeriSilicon Microelectronics (Shanghai) has 1 warning sign we think you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.