Lacklustre Performance Is Driving Highcon Systems Ltd.'s (TLV:HICN) Low P/S

Highcon Systems Ltd.'s (TLV:HICN) price-to-sales (or "P/S") ratio of 0.4x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Machinery industry in Israel have P/S ratios greater than 0.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Highcon Systems

What Does Highcon Systems' P/S Mean For Shareholders?

Highcon Systems certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Highcon Systems will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Highcon Systems?

Highcon Systems' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 36%. As a result, it also grew revenue by 10% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 17% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Highcon Systems is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

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 Highcon Systems confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

There are also other vital risk factors to consider before investing and we've discovered 5 warning signs for Highcon Systems that you should be aware of.

If you're unsure about the strength of Highcon Systems' 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.