InnoScience (Suzhou) Technology Holding Co., Ltd. (HKG:2577) Stocks Shoot Up 29% But Its P/S Still Looks Reasonable

InnoScience (Suzhou) Technology Holding Co., Ltd. (HKG:2577) shareholders have had their patience rewarded with a 29% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, given around half the companies in Hong Kong's Semiconductor industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider InnoScience (Suzhou) Technology Holding as a stock to avoid entirely with its 45x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for InnoScience (Suzhou) Technology Holding

How Has InnoScience (Suzhou) Technology Holding Performed Recently?

InnoScience (Suzhou) Technology Holding certainly has been doing a good job lately as it's been growing revenue more than most other companies. 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.

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

The only time you'd be truly comfortable seeing a P/S as steep as InnoScience (Suzhou) Technology Holding's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 40% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 73% per annum during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 21% per year growth forecast for the broader industry.

With this information, we can see why InnoScience (Suzhou) Technology Holding is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does InnoScience (Suzhou) Technology Holding's P/S Mean For Investors?

InnoScience (Suzhou) Technology Holding'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.

We've established that InnoScience (Suzhou) Technology Holding maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Semiconductor industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for InnoScience (Suzhou) Technology Holding with six simple checks on some of these key factors.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.