Why Investors Shouldn't Be Surprised By Sai MicroElectronics Inc.'s (SZSE:300456) 34% Share Price Surge

Sai MicroElectronics Inc. (SZSE:300456) shareholders would be excited to see that the share price has had a great month, posting a 34% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

Following the firm bounce in price, you could be forgiven for thinking Sai MicroElectronics is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.8x, considering almost half the companies in China's Electronic industry have P/S ratios below 3.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Sai MicroElectronics

What Does Sai MicroElectronics' Recent Performance Look Like?

Recent times have been advantageous for Sai MicroElectronics as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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?

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

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. The latest three year period has also seen an excellent 52% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 52% over the next year. That's shaping up to be materially higher than the 25% growth forecast for the broader industry.

With this information, we can see why Sai MicroElectronics is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Sai MicroElectronics' P/S Mean For Investors?

Sai MicroElectronics' P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Sai MicroElectronics maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electronic industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Sai MicroElectronics with six simple checks on some of these key factors.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.