Investors Give Rectifier Technologies Ltd (ASX:RFT) Shares A 27% Hiding

Rectifier Technologies Ltd (ASX:RFT) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Since its price has dipped substantially, it would be understandable if you think Rectifier Technologies is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.5x, considering almost half the companies in Australia's Electrical industry have P/S ratios above 1.7x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Rectifier Technologies

How Has Rectifier Technologies Performed Recently?

For example, consider that Rectifier Technologies' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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 out of favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Rectifier Technologies' earnings, revenue and cash flow.

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

Rectifier Technologies' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 38%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 106% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

This is in contrast to the rest of the industry, which is expected to grow by 17% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Rectifier Technologies' P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

The southerly movements of Rectifier Technologies' shares means its P/S is now sitting at a pretty low level. 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.

We're very surprised to see Rectifier Technologies currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Plus, you should also learn about these 3 warning signs we've spotted with Rectifier Technologies (including 2 which can't be ignored).

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.