Some Shareholders Feeling Restless Over Electro Optic Systems Holdings Limited's (ASX:EOS) P/S Ratio

With a median price-to-sales (or "P/S") ratio of close to 0.9x in the Aerospace & Defense industry in Australia, you could be forgiven for feeling indifferent about Electro Optic Systems Holdings Limited's (ASX:EOS) P/S ratio, which comes in at about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Electro Optic Systems Holdings

How Electro Optic Systems Holdings Has Been Performing

Electro Optic Systems Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. 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.

Keen to find out how analysts think Electro Optic Systems Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Electro Optic Systems Holdings?

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.

If we review the last year of revenue growth, the company posted a terrific increase of 82%. The latest three year period has also seen an excellent 42% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 9.8% per year during the coming three years according to the three analysts following the company. Meanwhile, the broader industry is forecast to expand by 10% each year, which paints a poor picture.

In light of this, it's somewhat alarming that Electro Optic Systems Holdings' P/S sits in line with the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

The Final Word

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.

While Electro Optic Systems Holdings' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

Before you settle on your opinion, we've discovered 1 warning sign for Electro Optic Systems Holdings that you should be aware of.

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.