GNI Group Ltd. (TSE:2160) Stock's 37% Dive Might Signal An Opportunity But It Requires Some Scrutiny

GNI Group Ltd. (TSE:2160) shareholders that were waiting for something to happen have been dealt a blow with a 37% share price drop in the last month. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 17%.

After such a large drop in price, GNI Group may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 2.8x, considering almost half of all companies in the Biotechs industry in Japan have P/S ratios greater than 24.1x and even P/S higher than 85x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for GNI Group

What Does GNI Group's P/S Mean For Shareholders?

Recent times have been pleasing for GNI Group as its revenue has risen in spite of the industry's average revenue going into reverse. Perhaps the market is expecting future revenue performance to follow the rest of the industry downwards, which has kept the P/S suppressed. 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 GNI Group will help you uncover what's on the horizon.

How Is GNI Group's Revenue Growth Trending?

GNI Group's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered an exceptional 57% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 141% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 40% per annum during the coming three years according to the dual analysts following the company. That's shaping up to be materially higher than the 32% each 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. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What Does GNI Group's P/S Mean For Investors?

Shares in GNI Group have plummeted and its P/S has followed suit. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

GNI Group's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. 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. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You need to take note of risks, for example - GNI Group has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com