Rectifier Technologies Limited (ASX:RFT) Stock's 30% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Rectifier Technologies Limited (ASX:RFT) shares have had a horrible month, losing 30% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 85% loss during that time.

Following the heavy fall in price, Rectifier Technologies may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.4x, considering almost half of all companies in the Electrical industry in Australia have P/S ratios greater than 1.5x and even P/S higher than 13x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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.

How Is Rectifier Technologies' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Rectifier Technologies' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. Still, the latest three year period has seen an excellent 106% overall rise in revenue, in spite of its unsatisfying short-term performance. 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.

With this in mind, we find it intriguing that Rectifier Technologies' P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What Does Rectifier Technologies' P/S Mean For Investors?

Rectifier Technologies' recently weak share price has pulled its P/S back below other Electrical companies. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

It is also worth noting that we have found 3 warning signs for Rectifier Technologies (2 are concerning!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.