GNI Group Ltd. (TSE:2160) Might Not Be As Mispriced As It Looks After Plunging 28%

Unfortunately for some shareholders, the GNI Group Ltd. (TSE:2160) share price has dived 28% in the last thirty days, prolonging recent pain. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 34% share price drop.

Even after such a large drop in price, GNI Group may still look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 3.8x, considering almost half of all companies in the Biotechs industry in Japan have P/S ratios greater than 22.1x and even P/S higher than 73x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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How Has GNI Group Performed Recently?

GNI Group 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. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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How Is GNI Group's Revenue Growth Trending?

In order to justify its P/S ratio, GNI Group would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered a frustrating 9.2% decrease to the company's top line. Even so, admirably revenue has lifted 86% in aggregate from three years ago, notwithstanding the last 12 months. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 51% per year during the coming three years according to the three analysts following the company. That's shaping up to be materially higher than the 40% per year growth forecast for the broader industry.

In light of this, it's peculiar that GNI Group'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 We Can Learn From GNI Group's P/S?

GNI Group's P/S looks about as weak as its stock price lately. 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.

A look at GNI Group's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

There are also other vital risk factors to consider and we've discovered 3 warning signs for GNI Group (2 are significant!) that you should be aware of before investing here.

If you're unsure about the strength of GNI Group'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.