Sai MicroElectronics Inc.'s (SZSE:300456) Price Is Out Of Tune With Revenues

Sai MicroElectronics Inc.'s (SZSE:300456) price-to-sales (or "P/S") ratio of 7.9x may look like a poor investment opportunity when you consider close to half the companies in the Electronic industry in China have P/S ratios below 3.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Sai MicroElectronics

How Has Sai MicroElectronics Performed Recently?

Recent times have been advantageous for Sai MicroElectronics 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. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Taking a look back first, we see that the company grew revenue by an impressive 72% last year. The latest three year period has also seen an excellent 72% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 23% during the coming year according to the one analyst following the company. That's shaping up to be similar to the 25% growth forecast for the broader industry.

With this information, we find it interesting that Sai MicroElectronics is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

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.

Given Sai MicroElectronics' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Sai MicroElectronics that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com