ShunSin Technology Holdings Limited's (TWSE:6451) Shares Climb 27% But Its Business Is Yet to Catch Up

Despite an already strong run, ShunSin Technology Holdings Limited (TWSE:6451) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 156% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given close to half the companies operating in Taiwan's Semiconductor industry have price-to-sales ratios (or "P/S") below 3.4x, you may consider ShunSin Technology Holdings as a stock to potentially avoid with its 4.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for ShunSin Technology Holdings

What Does ShunSin Technology Holdings' P/S Mean For Shareholders?

ShunSin Technology Holdings has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

ShunSin Technology Holdings' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 22% 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 alarming that ShunSin Technology Holdings' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

ShunSin Technology Holdings' P/S is on the rise since its shares have risen strongly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that ShunSin Technology Holdings currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for ShunSin Technology Holdings you should be aware of, and 2 of them are potentially serious.

If you're unsure about the strength of ShunSin Technology Holdings' 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.