There's Reason For Concern Over Telink Semiconductor(Shanghai)Co.,Ltd.'s (SHSE:688591) Massive 31% Price Jump

Those holding Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) shares would be relieved that the share price has rebounded 31% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, Telink Semiconductor(Shanghai)Co.Ltd may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 8.4x, since almost half of all companies in the Semiconductor in China have P/S ratios under 6.3x and even P/S lower than 3x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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

How Telink Semiconductor(Shanghai)Co.Ltd Has Been Performing

Revenue has risen at a steady rate over the last year for Telink Semiconductor(Shanghai)Co.Ltd, which is generally not a bad outcome. Perhaps the market believes the recent revenue performance is strong enough to outperform the industry, which has inflated the P/S ratio. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

Is There Enough Revenue Growth Forecasted For Telink Semiconductor(Shanghai)Co.Ltd?

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 managed to grow revenues by a handy 4.4% last year. Pleasingly, revenue has also lifted 40% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 37% shows it's noticeably less attractive.

With this in mind, we find it worrying that Telink Semiconductor(Shanghai)Co.Ltd's P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. 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 Key Takeaway

Telink Semiconductor(Shanghai)Co.Ltd shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Telink Semiconductor(Shanghai)Co.Ltd with six simple checks on some of these key factors.

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.