HighCom Limited's (ASX:HCL) Share Price Boosted 27% But Its Business Prospects Need A Lift Too

Explore HighCom's Fair Values from the Community and select yours

HighCom Limited (ASX:HCL) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 88%.

In spite of the firm bounce in price, given close to half the companies in Australia's Aerospace & Defense industry have price-to-sales ratios (or "P/S") above 5x, you may still consider HighCom as a highly attractive investment with its 0.8x P/S ratio. 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.

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See our latest analysis for HighCom

What Does HighCom's Recent Performance Look Like?

Recent times haven't been great for HighCom as its revenue has been rising slower than most other companies. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

How Is HighCom's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like HighCom's to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Although pleasingly revenue has lifted 107% in aggregate from three years ago, notwithstanding the last 12 months. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 6.3% as estimated by the lone analyst watching the company. With the industry predicted to deliver 16% growth, that's a disappointing outcome.

In light of this, it's understandable that HighCom's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

Even after such a strong price move, HighCom's P/S still trails the rest of the industry. 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.

It's clear to see that HighCom maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

It is also worth noting that we have found 2 warning signs for HighCom that you need to take into consideration.

If you're unsure about the strength of HighCom'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.