Subdued Growth No Barrier To Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) With Shares Advancing 26%

Despite an already strong run, Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) shares have been powering on, with a gain of 26% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

After such a large jump in price, Telink Semiconductor(Shanghai)Co.Ltd may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 10.4x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 7.2x and even P/S lower than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Telink Semiconductor(Shanghai)Co.Ltd

What Does Telink Semiconductor(Shanghai)Co.Ltd's P/S Mean For Shareholders?

Revenue has risen firmly for Telink Semiconductor(Shanghai)Co.Ltd recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Telink Semiconductor(Shanghai)Co.Ltd will help you shine a light on its historical performance.

How Is Telink Semiconductor(Shanghai)Co.Ltd's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Telink Semiconductor(Shanghai)Co.Ltd's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 15% last year. The latest three year period has also seen a 15% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 49% shows it's noticeably less attractive.

In light of this, it's alarming that Telink Semiconductor(Shanghai)Co.Ltd's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

Telink Semiconductor(Shanghai)Co.Ltd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Telink Semiconductor(Shanghai)Co.Ltd revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Telink Semiconductor(Shanghai)Co.Ltd is showing 2 warning signs in our investment analysis, you should know about.

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.