Electro Optic Systems Holdings Limited (ASX:EOS) Stocks Pounded By 28% But Not Lagging Industry On Growth Or Pricing

Electro Optic Systems Holdings Limited (ASX:EOS) shareholders that were waiting for something to happen have been dealt a blow with a 28% share price drop in the last month. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 272% in the last twelve months.

In spite of the heavy fall in price, Electro Optic Systems Holdings may still be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 7.5x, since almost half of all companies in the Aerospace & Defense industry in Australia have P/S ratios under 3.6x and even P/S lower than 1.5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Electro Optic Systems Holdings

How Electro Optic Systems Holdings Has Been Performing

Electro Optic Systems Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Electro Optic Systems Holdings.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Electro Optic Systems Holdings would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. This means it has also seen a slide in revenue over the longer-term as revenue is down 32% 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.

Turning to the outlook, the next year should generate growth of 48% as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 16% growth forecast for the broader industry.

In light of this, it's understandable that Electro Optic Systems Holdings' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

A significant share price dive has done very little to deflate Electro Optic Systems Holdings' very lofty P/S. 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.

As we suspected, our examination of Electro Optic Systems Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Electro Optic Systems Holdings with six simple checks on some of these key factors.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.