Why Investors Shouldn't Be Surprised By Medical Developments International Limited's (ASX:MVP) 28% Share Price Plunge

Medical Developments International Limited (ASX:MVP) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 44% in that time.

Following the heavy fall in price, Medical Developments International's price-to-sales (or "P/S") ratio of 1.7x might make it look like a strong buy right now compared to the wider Pharmaceuticals industry in Australia, where around half of the companies have P/S ratios above 4.6x and even P/S above 21x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Medical Developments International

What Does Medical Developments International's Recent Performance Look Like?

Medical Developments International could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For Medical Developments International?

Medical Developments International's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. The latest three year period has also seen an excellent 39% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 19% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 25% per year, which is noticeably more attractive.

In light of this, it's understandable that Medical Developments International's P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Medical Developments International's P/S?

Shares in Medical Developments International 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 expected, our analysis of Medical Developments International's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Medical Developments International 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.