Shenzhen Sunmoon Microelectronics Co., Ltd's (SHSE:688699) Business Is Trailing The Industry But Its Shares Aren't

It's not a stretch to say that Shenzhen Sunmoon Microelectronics Co., Ltd's (SHSE:688699) price-to-sales (or "P/S") ratio of 6.7x right now seems quite "middle-of-the-road" for companies in the Semiconductor industry in China, where the median P/S ratio is around 7.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Shenzhen Sunmoon Microelectronics

How Has Shenzhen Sunmoon Microelectronics Performed Recently?

As an illustration, revenue has deteriorated at Shenzhen Sunmoon Microelectronics over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shenzhen Sunmoon Microelectronics will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. This means it has also seen a slide in revenue over the longer-term as revenue is down 54% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 49% shows it's an unpleasant look.

With this information, we find it concerning that Shenzhen Sunmoon Microelectronics is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate 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 on the share price eventually.

The Final Word

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 look at Shenzhen Sunmoon Microelectronics revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Shenzhen Sunmoon Microelectronics (of which 1 makes us a bit uncomfortable!) 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.