Despite an already strong run, Interlink Electronics, Inc. (NASDAQ:LINK) shares have been powering on, with a gain of 34% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 20% in the last twelve months.

Since its price has surged higher, given around half the companies in the United States' Electronic industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Interlink Electronics as a stock to avoid entirely with its 5.3x 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.

What Does Interlink Electronics' P/S Mean For Shareholders?

Recent revenue growth for Interlink Electronics has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. 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?

Interlink Electronics' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Although pleasingly revenue has lifted 57% in aggregate from three years ago, notwithstanding the last 12 months. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Looking ahead now, revenue is anticipated to slump, contracting by 4.9% during the coming year according to the one analyst following the company. Meanwhile, the broader industry is forecast to expand by 9.1%, which paints a poor picture.

In light of this, it's alarming that Interlink Electronics' P/S sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What Does Interlink Electronics' P/S Mean For Investors?

Shares in Interlink Electronics have seen a strong upwards swing lately, which has really helped boost its P/S figure. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

For a company with revenues that are set to decline in the context of a growing industry, Interlink Electronics' P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

Plus, you should also learn about these 2 warning signs we've spotted with Interlink Electronics (including 1 which can't be ignored).

If you're unsure about the strength of Interlink Electronics' 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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