Shareholders Should Be Pleased With EKF Diagnostics Holdings plc's (LON:EKF) Price

With a median price-to-sales (or "P/S") ratio of close to 2.5x in the Medical Equipment industry in the United Kingdom, you could be forgiven for feeling indifferent about EKF Diagnostics Holdings plc's (LON:EKF) P/S ratio of 2.4x. 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.

Check out our latest analysis for EKF Diagnostics Holdings

How Has EKF Diagnostics Holdings Performed Recently?

EKF Diagnostics Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 9.1%. This means it has also seen a slide in revenue over the longer-term as revenue is down 34% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 8.2% per year during the coming three years according to the three analysts following the company. With the industry predicted to deliver 8.9% growth per year, the company is positioned for a comparable revenue result.

With this information, we can see why EKF Diagnostics Holdings is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Key Takeaway

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.

A EKF Diagnostics Holdings' P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Medical Equipment industry. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

Plus, you should also learn about these 3 warning signs we've spotted with EKF Diagnostics Holdings (including 1 which doesn't sit too well with us).

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.