Optimistic Investors Push Tai Tung Communication Co., Ltd. (TWSE:8011) Shares Up 26% But Growth Is Lacking

Tai Tung Communication Co., Ltd. (TWSE:8011) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last month tops off a massive increase of 110% in the last year.

Following the firm bounce in price, given close to half the companies operating in Taiwan's Communications industry have price-to-sales ratios (or "P/S") below 2x, you may consider Tai Tung Communication as a stock to potentially avoid with its 3x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for Tai Tung Communication

How Has Tai Tung Communication Performed Recently?

For example, consider that Tai Tung Communication's financial performance has been poor lately as its revenue has been in decline. 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.

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 Tai Tung Communication's earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Tai Tung Communication's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 8.1% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 17% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 17% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Tai Tung Communication 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.

The Bottom Line On Tai Tung Communication's P/S

The large bounce in Tai Tung Communication's shares has lifted the company's P/S handsomely. 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 Tai Tung Communication revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. 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.

Before you settle on your opinion, we've discovered 3 warning signs for Tai Tung Communication (2 are concerning!) that you should be aware of.

If these risks are making you reconsider your opinion on Tai Tung Communication, 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.