There's Reason For Concern Over Ellipsiz Ltd's (SGX:BIX) Massive 34% Price Jump

The Ellipsiz Ltd (SGX:BIX) share price has done very well over the last month, posting an excellent gain of 34%. Taking a wider view, although not as strong as the last month, the full year gain of 20% is also fairly reasonable.

In spite of the firm bounce in price, it's still not a stretch to say that Ellipsiz's price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" compared to the Semiconductor industry in Singapore, 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.

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See our latest analysis for Ellipsiz

How Ellipsiz Has Been Performing

Ellipsiz has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to wane, 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.

Although there are no analyst estimates available for Ellipsiz, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Ellipsiz's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 8.4%. Revenue has also lifted 6.0% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 27% shows it's noticeably less attractive.

With this information, we find it interesting that Ellipsiz is trading at a fairly similar P/S compared to the industry. 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. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Ellipsiz appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Ellipsiz's 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.

Before you take the next step, you should know about the 4 warning signs for Ellipsiz (3 make us uncomfortable!) that we have uncovered.

If you're unsure about the strength of Ellipsiz's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.