Hua Hong Semiconductor Limited (HKG:1347) shares have continued their recent momentum with a 28% gain in the last month alone. The last month tops off a massive increase of 183% in the last year.

Since its price has surged higher, when almost half of the companies in Hong Kong's Semiconductor industry have price-to-sales ratios (or "P/S") below 1.6x, you may consider Hua Hong Semiconductor as a stock not worth researching with its 4.8x 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 so lofty.

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See our latest analysis for Hua Hong Semiconductor

What Does Hua Hong Semiconductor's P/S Mean For Shareholders?

Hua Hong Semiconductor could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Hua Hong Semiconductor's to be considered reasonable.

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 1.0% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the analysts watching the company. With the industry predicted to deliver 23% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Hua Hong Semiconductor is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Hua Hong Semiconductor's P/S?

Shares in Hua Hong Semiconductor have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that Hua Hong Semiconductor currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Hua Hong Semiconductor (of which 1 makes us a bit uncomfortable!) you should know about.

If you're unsure about the strength of Hua Hong Semiconductor's 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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