There's Reason For Concern Over Telink Semiconductor(Shanghai)Co.,Ltd.'s (SHSE:688591) Massive 33% Price Jump

Telink Semiconductor(Shanghai)Co.,Ltd. (SHSE:688591) shares have continued their recent momentum with a 33% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Since its price has surged higher, Telink Semiconductor(Shanghai)Co.Ltd may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 8.9x, since almost half of all companies in the Semiconductor in China have P/S ratios under 6.9x and even P/S lower than 3x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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

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

The revenue growth achieved at Telink Semiconductor(Shanghai)Co.Ltd over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 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. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 41% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Telink Semiconductor(Shanghai)Co.Ltd is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From Telink Semiconductor(Shanghai)Co.Ltd's P/S?

Telink Semiconductor(Shanghai)Co.Ltd's P/S is on the rise since its shares have risen strongly. 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.

The fact that Telink Semiconductor(Shanghai)Co.Ltd currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. 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. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Telink Semiconductor(Shanghai)Co.Ltd that you should be aware of.

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.