Why Investors Shouldn't Be Surprised By VeriSilicon Microelectronics (Shanghai) Co., Ltd.'s (SHSE:688521) 28% Share Price Surge

The VeriSilicon Microelectronics (Shanghai) Co., Ltd. (SHSE:688521) share price has done very well over the last month, posting an excellent gain of 28%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 40% over that time.

After such a large jump in price, VeriSilicon Microelectronics (Shanghai) may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 8.6x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 5.4x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for VeriSilicon Microelectronics (Shanghai)

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

While the industry has experienced revenue growth lately, VeriSilicon Microelectronics (Shanghai)'s revenue has gone into reverse gear, which is not great. 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.

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

VeriSilicon Microelectronics (Shanghai)'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.

Retrospectively, the last year delivered a frustrating 21% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Turning to the outlook, the next year should generate growth of 44% as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 36%, which is noticeably less attractive.

With this information, we can see why VeriSilicon Microelectronics (Shanghai) 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.

What We Can Learn From VeriSilicon Microelectronics (Shanghai)'s P/S?

The strong share price surge has lead to VeriSilicon Microelectronics (Shanghai)'s P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into VeriSilicon Microelectronics (Shanghai) shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you take the next step, you should know about the 1 warning sign for VeriSilicon Microelectronics (Shanghai) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.