There's Reason For Concern Over Lien Chang Electronic Enterprise Co., Ltd's (TWSE:2431) Massive 33% Price Jump

Lien Chang Electronic Enterprise Co., Ltd (TWSE:2431) shareholders have had their patience rewarded with a 33% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

After such a large jump in price, you could be forgiven for thinking Lien Chang Electronic Enterprise is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4x, considering almost half the companies in Taiwan's Electronic industry have P/S ratios below 1.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Check out our latest analysis for Lien Chang Electronic Enterprise

What Does Lien Chang Electronic Enterprise's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Lien Chang Electronic Enterprise over the last year, which is not ideal at all. 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.

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

Is There Enough Revenue Growth Forecasted For Lien Chang Electronic Enterprise?

Lien Chang Electronic Enterprise'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.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 37%. The last three years don't look nice either as the company has shrunk revenue by 77% in aggregate. 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 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Lien Chang Electronic Enterprise's P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Lien Chang Electronic Enterprise's P/S?

Lien Chang Electronic Enterprise's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our examination of Lien Chang Electronic Enterprise 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. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Lien Chang Electronic Enterprise (1 shouldn't be ignored!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Lien Chang Electronic Enterprise, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.