Optimistic Investors Push CML Microsystems plc (LON:CML) Shares Up 27% But Growth Is Lacking

CML Microsystems plc (LON:CML) shares have continued their recent momentum with a 27% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 3.9% over the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about CML Microsystems' P/S ratio of 2.2x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in the United Kingdom is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for CML Microsystems

How Has CML Microsystems Performed Recently?

We'd have to say that with no tangible growth over the last year, CML Microsystems' revenue has been unimpressive. It might be that many expect the uninspiring revenue performance to only match most other companies at best over the coming period, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on CML Microsystems' earnings, revenue and cash flow.

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

In order to justify its P/S ratio, CML Microsystems would need to produce growth that's similar to the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 35% overall rise in revenue, in spite of its uninspiring short-term performance. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Comparing that to the industry, which is predicted to deliver 23% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that CML Microsystems' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now CML Microsystems' P/S is back within range of the industry median. 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 CML Microsystems' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with CML Microsystems (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

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.