Why Investors Shouldn't Be Surprised By ArcSoft Corporation Limited's (SHSE:688088) 25% Share Price Surge

ArcSoft Corporation Limited (SHSE:688088) shares have continued their recent momentum with a 25% gain in the last month alone. Unfortunately, despite the strong performance over the last month, the full year gain of 6.2% isn't as attractive.

After such a large jump in price, when almost half of the companies in China's Software industry have price-to-sales ratios (or "P/S") below 6.8x, you may consider ArcSoft as a stock not worth researching with its 22.6x 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.

Check out 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 the market expects this form will continue into the future, hence the elevated P/S ratio. 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.

Is There Enough Revenue Growth Forecasted For ArcSoft?

The only time you'd be truly comfortable seeing a P/S as steep as ArcSoft's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 15% gain to the company's top line. As a result, it also grew revenue by 18% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 36% as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 30%, which is noticeably less attractive.

With this information, we can see why ArcSoft is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to ArcSoft's P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into ArcSoft shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. 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.

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.