Tongfu Microelectronics Co.,Ltd's (SZSE:002156) Shares Bounce 36% But Its Business Still Trails The Industry

Tongfu Microelectronics Co.,Ltd (SZSE:002156) shares have had a really impressive month, gaining 36% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 30% in the last year.

Although its price has surged higher, Tongfu MicroelectronicsLtd may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.6x, since almost half of all companies in the Semiconductor industry in China have P/S ratios greater than 6.2x and even P/S higher than 11x 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 so limited.

Check out our latest analysis for Tongfu MicroelectronicsLtd

What Does Tongfu MicroelectronicsLtd's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Tongfu MicroelectronicsLtd has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tongfu MicroelectronicsLtd.

How Is Tongfu MicroelectronicsLtd's Revenue Growth Trending?

In order to justify its P/S ratio, Tongfu MicroelectronicsLtd would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a decent 7.7% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 78% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 21% over the next year. That's shaping up to be materially lower than the 36% growth forecast for the broader industry.

With this information, we can see why Tongfu MicroelectronicsLtd is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Tongfu MicroelectronicsLtd's P/S?

Even after such a strong price move, Tongfu MicroelectronicsLtd's P/S still trails the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Tongfu MicroelectronicsLtd's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Tongfu MicroelectronicsLtd that you should be aware of.

If these risks are making you reconsider your opinion on Tongfu MicroelectronicsLtd, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.