Investors Give Pentanet Limited (ASX:5GG) Shares A 27% Hiding

To the annoyance of some shareholders, Pentanet Limited (ASX:5GG) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 76% share price decline.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Pentanet's P/S ratio of 1.4x, since the median price-to-sales (or "P/S") ratio for the Telecom industry in Australia is also close to 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Pentanet

How Has Pentanet Performed Recently?

Recent times have been advantageous for Pentanet as its revenues have been rising faster than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pentanet.

How Is Pentanet's Revenue Growth Trending?

Pentanet's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. The latest three year period has also seen an excellent 282% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 30% as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 7.3% growth forecast for the broader industry.

With this information, we find it interesting that Pentanet is trading at a fairly similar P/S compared to the industry. It may be that most investors aren't convinced the company can achieve future growth expectations.

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

With its share price dropping off a cliff, the P/S for Pentanet looks to be in line with the rest of the Telecom industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Pentanet currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Pentanet (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.