Lingda Group Co., Ltd.'s (SZSE:300125) 36% Price Boost Is Out Of Tune With Revenues

Lingda Group Co., Ltd. (SZSE:300125) shares have continued their recent momentum with a 36% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 45% in the last twelve months.

Following the firm bounce in price, Lingda Group's price-to-sales (or "P/S") ratio of 16.9x might make it look like a strong sell right now compared to other companies in the Semiconductor industry in China, where around half of the companies have P/S ratios below 6.9x and even P/S below 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Lingda Group

What Does Lingda Group's Recent Performance Look Like?

For instance, Lingda Group's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Lingda Group?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Lingda Group's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 91% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 89% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 46% shows it's an unpleasant look.

In light of this, it's alarming that Lingda Group's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Bottom Line On Lingda Group's P/S

The strong share price surge has lead to Lingda Group's P/S soaring as well. 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 Lingda Group 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. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Lingda Group you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.