Subdued Growth No Barrier To Gale Pacific Limited (ASX:GAP) With Shares Advancing 45%

Gale Pacific Limited (ASX:GAP) shareholders would be excited to see that the share price has had a great month, posting a 45% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 22% over that time.

Although its price has surged higher, it's still not a stretch to say that Gale Pacific's price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" compared to the Consumer Durables industry in Australia, where the median P/S ratio is around 0.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Gale Pacific

What Does Gale Pacific's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Gale Pacific over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Gale Pacific's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.7%. As a result, revenue from three years ago have also fallen 16% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 7.2% shows it's an unpleasant look.

With this information, we find it concerning that Gale Pacific is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What We Can Learn From Gale Pacific's P/S?

Gale Pacific appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Gale Pacific currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while 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. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Gale Pacific (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

If you're unsure about the strength of Gale Pacific'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.