Onto Innovation Inc. (NYSE:ONTO) shareholders have had their patience rewarded with a 29% share price jump in the last month. The annual gain comes to 121% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Onto Innovation may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 13.3x, when you consider almost half of the companies in the Semiconductor industry in the United States have P/S ratios under 4.2x and even P/S lower than 1.8x aren't out of the ordinary. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

How Has Onto Innovation Performed Recently?

Onto Innovation hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Onto Innovation's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 44% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 16% per annum over the next three years. With the industry predicted to deliver 25% growth per year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Onto Innovation's P/S is outpacing its industry peers. 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.

The Bottom Line On Onto Innovation's P/S

The strong share price surge has lead to Onto Innovation's P/S soaring as well. 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 concluded that Onto Innovation 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for Onto Innovation with six simple checks on some of these key factors.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.