Microtek International, Inc. (TWSE:2305) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Microtek International, Inc. (TWSE:2305) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Taking a wider view, although not as strong as the last month, the full year gain of 11% is also fairly reasonable.

Following the firm bounce in price, when almost half of the companies in Taiwan's Electronic industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Microtek International as a stock not worth researching with its 10.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Microtek International

What Does Microtek International's P/S Mean For Shareholders?

For example, consider that Microtek International's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Microtek International's earnings, revenue and cash flow.

How Is Microtek International's Revenue Growth Trending?

Microtek International's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 3.4% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 10% shows it's noticeably less attractive.

With this information, we find it concerning that Microtek International is trading at a P/S higher than the industry. 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.

What Does Microtek International's P/S Mean For Investors?

The strong share price surge has lead to Microtek International's P/S soaring as well. 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.

The fact that Microtek International 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 see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. 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.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Microtek International with six simple checks will allow you to discover any risks that could be an issue.

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.