Guangzhou Anyka Microelectronics Co., Ltd.'s (SHSE:688620) Shares Climb 27% But Its Business Is Yet to Catch Up

Guangzhou Anyka Microelectronics Co., Ltd. (SHSE:688620) shares have continued their recent momentum with a 27% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

In spite of the firm bounce in price, it's still not a stretch to say that Guangzhou Anyka Microelectronics' price-to-sales (or "P/S") ratio of 8x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in China, where the median P/S ratio is around 7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Guangzhou Anyka Microelectronics

What Does Guangzhou Anyka Microelectronics' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Guangzhou Anyka Microelectronics has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Guangzhou Anyka Microelectronics will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, Guangzhou Anyka Microelectronics would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.3%. The latest three year period has also seen a 12% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 31% as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 49%, which is noticeably more attractive.

In light of this, it's curious that Guangzhou Anyka Microelectronics' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Guangzhou Anyka Microelectronics' P/S

Its shares have lifted substantially and now Guangzhou Anyka Microelectronics' P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

When you consider that Guangzhou Anyka Microelectronics' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware Guangzhou Anyka Microelectronics is showing 1 warning sign 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.