Aerometrex Limited (ASX:AMX) Surges 32% Yet Its Low P/S Is No Reason For Excitement

The Aerometrex Limited (ASX:AMX) share price has done very well over the last month, posting an excellent gain of 32%. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 17% over that time.

In spite of the firm bounce in price, considering around half the companies operating in Australia's Professional Services industry have price-to-sales ratios (or "P/S") above 1.6x, you may still consider Aerometrex as an solid investment opportunity with its 1.1x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Aerometrex

What Does Aerometrex's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Aerometrex over the last year, which is not ideal at all. 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.

Although there are no analyst estimates available for Aerometrex, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Aerometrex?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.4%. The last three years don't look nice either as the company has shrunk revenue by 4.5% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 4.0% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that Aerometrex's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Aerometrex's P/S?

The latest share price surge wasn't enough to lift Aerometrex's P/S close to the industry median. 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 examination of Aerometrex confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Aerometrex (2 are a bit unpleasant!) that you need to take into consideration.

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