When you see that almost half of the companies in the Electronic industry in Taiwan have price-to-sales ratios (or “P/S”) below 1.6x, Lien Chang Electronic Enterprise Co., Ltd (TWSE:2431) looks to be giving off some sell signals with its 2.3x P/S ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the elevated P/S.
View our latest analysis for Lien Chang Electronic Enterprise
What Does Lien Chang Electronic Enterprise’s Recent Performance Look Like?
For example, consider that Lien Chang Electronic Enterprise’s financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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 Lien Chang Electronic Enterprise’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 Lien Chang Electronic Enterprise’s is when the company’s growth is on track to outshine the industry.
Retrospectively, the last year delivered a frustrating 46% decrease to the company’s top line. As a result, revenue from three years ago have also fallen 74% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Weighing that medium-term revenue trajectory against the broader industry’s one-year forecast for expansion of 12% shows it’s an unpleasant look.
With this information, we find it concerning that Lien Chang Electronic Enterprise 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 Final Word
Typically, we’d caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the 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. 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.
It is also worth noting that we have found 1 warning sign for Lien Chang Electronic Enterprise that you need to take into consideration.
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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Find out whether Lien Chang Electronic Enterprise is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.
