Electro Optic Systems Holdings Limited's (ASX:EOS) Popularity With Investors Under Threat As Stock Sinks 25%

Electro Optic Systems Holdings Limited (ASX:EOS) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 38% in the last year.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Electro Optic Systems Holdings' P/S ratio of 0.9x, since the median price-to-sales (or "P/S") ratio for the Aerospace & Defense industry in Australia is also close to 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Electro Optic Systems Holdings

What Does Electro Optic Systems Holdings' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Electro Optic Systems Holdings has been doing relatively well. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Electro Optic Systems Holdings' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 82% last year. The strong recent performance means it was also able to grow revenue by 42% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 2.0% per annum during the coming three years according to the seven analysts following the company. With the industry predicted to deliver 7.4% growth per annum, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Electro Optic Systems Holdings' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Electro Optic Systems Holdings' P/S Mean For Investors?

Following Electro Optic Systems Holdings' share price tumble, its P/S is just clinging on to the industry median P/S. 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.

Given that Electro Optic Systems Holdings' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Electro Optic Systems Holdings that you should be aware of.

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.