IQE plc's (LON:IQE) Shares Leap 28% Yet They're Still Not Telling The Full Story

Despite an already strong run, IQE plc (LON:IQE) shares have been powering on, with a gain of 28% in the last thirty days. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

Although its price has surged higher, it's still not a stretch to say that IQE's price-to-sales (or "P/S") ratio of 2.4x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in the United Kingdom, seeing as it matches the P/S ratio of the wider industry. 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.

See our latest analysis for IQE

What Does IQE's Recent Performance Look Like?

IQE could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

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

The only time you'd be comfortable seeing a P/S like IQE's is when the company's growth is tracking the industry closely.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 31%. This means it has also seen a slide in revenue over the longer-term as revenue is down 35% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 17% per annum during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 12% each year growth forecast for the broader industry.

In light of this, it's curious that IQE's P/S sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

IQE's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Despite enticing revenue growth figures that outpace the industry, IQE's P/S isn't quite what we'd expect. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You need to take note of risks, for example - IQE has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

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.