Risks To Shareholder Returns Are Elevated At These Prices For RP Optical Lab Ltd (TLV:RPOL)
When you see that almost half of the companies in the Electronic industry in Israel have price-to-sales ratios (or "P/S") below 1.9x, RP Optical Lab Ltd (TLV:RPOL) looks to be giving off strong sell signals with its 11.3x 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.
View our latest analysis for RP Optical Lab
How Has RP Optical Lab Performed Recently?
Recent times have been quite advantageous for RP Optical Lab as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.
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 RP Optical Lab's earnings, revenue and cash flow.Is There Enough Revenue Growth Forecasted For RP Optical Lab?
In order to justify its P/S ratio, RP Optical Lab would need to produce outstanding growth that's well in excess of the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 33%. The latest three year period has also seen an excellent 76% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
This is in contrast to the rest of the industry, which is expected to grow by 54% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this information, we find it concerning that RP Optical Lab is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.
The Key Takeaway
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
The fact that RP Optical Lab currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.
And what about other risks? Every company has them, and we've spotted 2 warning signs for RP Optical Lab you should know about.
If you're unsure about the strength of RP Optical Lab's 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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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.