ArcSoft Corporation Limited's (SHSE:688088) P/S Is Still On The Mark Following 43% Share Price Bounce

The ArcSoft Corporation Limited (SHSE:688088) share price has done very well over the last month, posting an excellent gain of 43%. The annual gain comes to 100% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in China's Software industry have price-to-sales ratios (or "P/S") below 7.3x, you may consider ArcSoft as a stock not worth researching with its 28.3x P/S ratio. 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.

View our latest analysis for ArcSoft

How ArcSoft Has Been Performing

Recent times have been advantageous for ArcSoft as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think ArcSoft's future stacks up against the industry? In that case, our free report is a great place to start.

How Is ArcSoft's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 15%. The latest three year period has also seen a 18% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue should grow by 39% over the next year. With the industry only predicted to deliver 28%, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why ArcSoft's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does ArcSoft's P/S Mean For Investors?

ArcSoft's 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.

We've established that ArcSoft maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

And what about other risks? Every company has them, and we've spotted 2 warning signs for ArcSoft 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.