There's Reason For Concern Over Shin Foong Specialty and Applied Materials Co., Ltd.'s (TWSE:6582) Massive 30% Price Jump

Shin Foong Specialty and Applied Materials Co., Ltd. (TWSE:6582) shares have continued their recent momentum with a 30% gain in the last month alone. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

Since its price has surged higher, given around half the companies in Taiwan's Chemicals industry have price-to-sales ratios (or "P/S") below 1.9x, you may consider Shin Foong Specialty and Applied Materials as a stock to avoid entirely with its 7.8x 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.

View our latest analysis for Shin Foong Specialty and Applied Materials

How Has Shin Foong Specialty and Applied Materials Performed Recently?

As an illustration, revenue has deteriorated at Shin Foong Specialty and Applied Materials over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Shin Foong Specialty and Applied Materials will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Shin Foong Specialty and Applied Materials?

The only time you'd be truly comfortable seeing a P/S as steep as Shin Foong Specialty and Applied Materials' is when the company's growth is on track to outshine the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. As a result, revenue from three years ago have also fallen 86% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 7.4% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Shin Foong Specialty and Applied Materials' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Shin Foong Specialty and Applied Materials' P/S soaring as well. 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.

Our examination of Shin Foong Specialty and Applied Materials revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shin Foong Specialty and Applied Materials that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com