Yahoo Finance Some Confidence Is Lacking In Filtronic plc's (LON:FTC) P/S
When you see that almost half of the companies in the Communications industry in the United Kingdom have price-to-sales ratios (or "P/S") below 1x, Filtronic plc (LON:FTC) looks to be giving off some sell signals with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Filtronic
How Filtronic Has Been Performing
Filtronic has been doing a reasonable job lately as its revenue hasn't declined as much as most other companies. The P/S ratio is probably high because investors think this comparatively better revenue performance will continue. While you'd prefer that its revenue trajectory turned around, you'd at least be hoping it remains less negative than other companies, otherwise you're paying a pretty hefty price for no particular reason.
Want the full picture on analyst estimates for the company? Then our free report on Filtronic will help you uncover what's on the horizon.
How Is Filtronic's Revenue Growth Trending?
In order to justify its P/S ratio, Filtronic would need to produce impressive growth in excess of the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.6%. This means it has also seen a slide in revenue over the longer-term as revenue is down 5.3% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 27% over the next year. Meanwhile, the rest of the industry is forecast to expand by 30%, which is noticeably more attractive.
In light of this, it's alarming that Filtronic's P/S sits above the majority of other companies. 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 Key Takeaway
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.
It comes as a surprise to see Filtronic trade at such a high P/S given the revenue forecasts look less than stellar. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
It is also worth noting that we have found 2 warning signs for Filtronic that you need to take into consideration.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.