Investors Don't See Light At End Of Futura Medical plc's (LON:FUM) Tunnel And Push Stock Down 75%

Futura Medical plc (LON:FUM) shareholders that were waiting for something to happen have been dealt a blow with a 75% share price drop in the last month. For any long-term shareholders, the last month ends a year to forget by locking in a 93% share price decline.

After such a large drop in price, Futura Medical's price-to-sales (or "P/S") ratio of 0.8x might make it look like a buy right now compared to the Pharmaceuticals industry in the United Kingdom, where around half of the companies have P/S ratios above 2.4x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Futura Medical

What Does Futura Medical's P/S Mean For Shareholders?

Futura Medical could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

Keen to find out how analysts think Futura Medical's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Any Revenue Growth Forecasted For Futura Medical?

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

Retrospectively, the last year delivered a frustrating 5.6% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to slump, contracting by 36% during the coming year according to the only analyst following the company. That's not great when the rest of the industry is expected to grow by 5.6%.

With this information, we are not surprised that Futura Medical is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

The southerly movements of Futura Medical's shares means its P/S is now sitting at a pretty low level. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

It's clear to see that Futura Medical maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Having said that, be aware Futura Medical is showing 2 warning signs in our investment analysis, you should know about.

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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.