Lumos Diagnostics Holdings Limited (ASX:LDX) Looks Inexpensive After Falling 27% But Perhaps Not Attractive Enough

The Lumos Diagnostics Holdings Limited (ASX:LDX) share price has fared very poorly over the last month, falling by a substantial 27%. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 52% loss during that time.

Since its price has dipped substantially, Lumos Diagnostics Holdings may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.3x, since almost half of all companies in the Medical Equipment industry in Australia have P/S ratios greater than 4.1x and even P/S higher than 15x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Lumos Diagnostics Holdings

What Does Lumos Diagnostics Holdings' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Lumos Diagnostics Holdings, which is generally not a bad outcome. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders may have reason to be 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 Lumos Diagnostics Holdings' earnings, revenue and cash flow.

How Is Lumos Diagnostics Holdings' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as depressed as Lumos Diagnostics Holdings' is when the company's growth is on track to lag the industry decidedly.

Retrospectively, the last year delivered a decent 5.7% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 41% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why Lumos Diagnostics Holdings' P/S is lower than most of its industry peers. 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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Lumos Diagnostics Holdings' P/S

Shares in Lumos Diagnostics Holdings have plummeted and its P/S has followed suit. 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.

As we suspected, our examination of Lumos Diagnostics Holdings revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Lumos Diagnostics Holdings (of which 2 are a bit concerning!) you should know about.

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.