Investors Don't See Light At End Of Ecofibre Limited's (ASX:EOF) Tunnel And Push Stock Down 26%
To the annoyance of some shareholders, Ecofibre Limited (ASX:EOF) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.
Following the heavy fall in price, Ecofibre's price-to-sales (or "P/S") ratio of 1.3x might make it look like a strong buy right now compared to the wider Pharmaceuticals industry in Australia, where around half of the companies have P/S ratios above 8.2x and even P/S above 30x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.
See our latest analysis for Ecofibre
What Does Ecofibre's Recent Performance Look Like?
Revenue has risen firmly for Ecofibre recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Ecofibre will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
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 Ecofibre's earnings, revenue and cash flow.
Do Revenue Forecasts Match The Low P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as depressed as Ecofibre's is when the company's growth is on track to lag the industry decidedly.
Retrospectively, the last year delivered a decent 7.6% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 36% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Comparing that to the industry, which is predicted to deliver 95% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.
With this in mind, we understand why Ecofibre's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.
What Does Ecofibre's P/S Mean For Investors?
Having almost fallen off a cliff, Ecofibre's share price has pulled its P/S way down as well. 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.
It's no surprise that Ecofibre maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.
Before you take the next step, you should know about the 3 warning signs for Ecofibre (1 shouldn't be ignored!) that we have uncovered.
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.
