There's Reason For Concern Over Tech Semiconductors Co., Ltd.'s (SZSE:300046) Massive 35% Price Jump

Tech Semiconductors Co., Ltd. (SZSE:300046) shares have continued their recent momentum with a 35% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 26%.

After such a large jump in price, Tech Semiconductors may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 15.7x, when you consider almost half of the companies in the Semiconductor industry in China have P/S ratios under 5.5x and even P/S lower than 2x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Tech Semiconductors

How Has Tech Semiconductors Performed Recently?

For instance, Tech Semiconductors' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Tech Semiconductors' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Tech Semiconductors?

In order to justify its P/S ratio, Tech Semiconductors would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. As a result, revenue from three years ago have also fallen 25% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Tech Semiconductors' P/S sits above the majority of other companies. 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 heavily on the share price eventually.

What We Can Learn From Tech Semiconductors' P/S?

Tech Semiconductors' P/S has grown nicely over the last month thanks to a handy boost in the share price. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Tech Semiconductors revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Tech Semiconductors, and understanding should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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