With A 38% Price Drop For Cyclopharm Limited (ASX:CYC) You'll Still Get What You Pay For

Cyclopharm Limited (ASX:CYC) shares have had a horrible month, losing 38% after a relatively good period beforehand. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 21% share price drop.

Although its price has dipped substantially, Cyclopharm may still be sending sell signals at present with a price-to-sales (or "P/S") ratio of 5.6x, when you consider almost half of the companies in the Medical Equipment industry in Australia have P/S ratios under 3.8x and even P/S lower than 1.7x 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 elevated P/S.

Check out our latest analysis for Cyclopharm

What Does Cyclopharm's Recent Performance Look Like?

Cyclopharm could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Cyclopharm will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Cyclopharm?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 38% overall rise in revenue, in spite of its uninspiring short-term performance. So while the company has done a solid job in the past, it's somewhat concerning to see revenue growth decline as much as it has.

Turning to the outlook, the next three years should generate growth of 50% each year as estimated by the lone analyst watching the company. That's shaping up to be materially higher than the 11% per year growth forecast for the broader industry.

With this in mind, it's not hard to understand why Cyclopharm's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

Cyclopharm's P/S remain high even after its stock plunged. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Cyclopharm shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 3 warning signs for Cyclopharm that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.