ArcSoft Corporation Limited's (SHSE:688088) 26% Cheaper Price Remains In Tune With Revenues

ArcSoft Corporation Limited (SHSE:688088) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 22% in that time.

Although its price has dipped substantially, ArcSoft's price-to-sales (or "P/S") ratio of 16.4x might still make it look like a strong sell right now compared to other companies in the Software industry in China, where around half of the companies have P/S ratios below 4.2x and even P/S below 2x are quite common. 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 ArcSoft

What Does ArcSoft's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, ArcSoft has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on ArcSoft.

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

In order to justify its P/S ratio, ArcSoft would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 1.9% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 37% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 28% growth forecast for the broader industry.

With this in mind, it's not hard to understand why ArcSoft's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

A significant share price dive has done very little to deflate ArcSoft's very lofty P/S. 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.

We've established that ArcSoft maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 1 warning sign for ArcSoft that we have uncovered.

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.