It's Down 75% But Innovatec S.p.A. (BIT:INC) Could Be Riskier Than It Looks

Innovatec S.p.A. (BIT:INC) shareholders that were waiting for something to happen have been dealt a blow with a 75% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 80% loss during that time.

Although its price has dipped substantially, when close to half the companies operating in Italy's Electrical industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider Innovatec as an enticing stock to check out with its 0.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Innovatec

How Has Innovatec Performed Recently?

With revenue growth that's superior to most other companies of late, Innovatec has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus 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 analyst estimates for the company? Then our free report on Innovatec will help you uncover what's on the horizon.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Innovatec would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a decent 9.6% gain to the company's revenues. The latest three year period has also seen an excellent 215% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 16% each year during the coming three years according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 9.8% each year, which is noticeably less attractive.

In light of this, it's peculiar that Innovatec's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What Does Innovatec's P/S Mean For Investors?

Innovatec's recently weak share price has pulled its P/S back below other Electrical companies. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

To us, it seems Innovatec currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Innovatec (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.