Semiconductor Manufacturing International Corporation's (HKG:981) 31% Share Price Surge Not Quite Adding Up

Semiconductor Manufacturing International Corporation (HKG:981) shares have continued their recent momentum with a 31% gain in the last month alone. This latest share price bounce rounds out a remarkable 328% gain over the last twelve months.

After such a large jump in price, given around half the companies in Hong Kong's Semiconductor industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Semiconductor Manufacturing International as a stock to avoid entirely with its 7.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Semiconductor Manufacturing International

What Does Semiconductor Manufacturing International's Recent Performance Look Like?

Recent times have been advantageous for Semiconductor Manufacturing International 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 Semiconductor Manufacturing International.

How Is Semiconductor Manufacturing International's Revenue Growth Trending?

In order to justify its P/S ratio, Semiconductor Manufacturing International 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 27% last year. The latest three year period has also seen an excellent 31% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 13% per year during the coming three years according to the analysts following the company. That's shaping up to be materially lower than the 23% each year growth forecast for the broader industry.

In light of this, it's alarming that Semiconductor Manufacturing International's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Shares in Semiconductor Manufacturing International have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 concluded that Semiconductor Manufacturing International currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Semiconductor Manufacturing International that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.