Orbital Corporation Limited's (ASX:OEC) 29% Share Price Plunge Could Signal Some Risk

Orbital Corporation Limited (ASX:OEC) shares have had a horrible month, losing 29% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 40% in that time.

Although its price has dipped substantially, there still wouldn't be many who think Orbital's price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S in Australia's Aerospace & Defense industry is similar at about 1x. 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 Orbital

How Has Orbital Performed Recently?

Revenue has risen at a steady rate over the last year for Orbital, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. Those who are bullish on Orbital will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Orbital will help you shine a light on its historical performance.

How Is Orbital's Revenue Growth Trending?

In order to justify its P/S ratio, Orbital would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.7%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 50% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 46% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Orbital is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Orbital's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Orbital looks to be in line with the rest of the Aerospace & Defense industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at Orbital revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 4 warning signs we've spotted with Orbital (including 2 which are potentially serious).

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.