Getting In Cheap On Filtronic plc (LON:FTC) Is Unlikely

When close to half the companies in the Communications industry in the United Kingdom have price-to-sales ratios (or "P/S") below 1.1x, you may consider Filtronic plc (LON:FTC) as a stock to avoid entirely with its 5.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for Filtronic

What Does Filtronic's Recent Performance Look Like?

Recent times have been advantageous for Filtronic as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Filtronic?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Filtronic's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 121% last year. The latest three year period has also seen an excellent 230% 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 three analysts covering the company suggest revenue growth is heading into negative territory, declining 2.5% over the next year. That's not great when the rest of the industry is expected to grow by 71%.

With this information, we find it concerning that Filtronic is trading at a P/S higher than the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

The Final Word

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.

Our examination of Filtronic's analyst forecasts revealed that its shrinking revenue outlook isn't drawing down its high P/S anywhere near as much as we would have predicted. Right now we aren't comfortable with the high P/S as the predicted future revenue decline likely to impact the positive sentiment that's propping up the P/S. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

Before you take the next step, you should know about the 3 warning signs for Filtronic (2 make us uncomfortable!) that we have uncovered.

If you're unsure about the strength of Filtronic's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.