Fabryka Obrabiarek RAFAMET S.A.'s (WSE:RAF) 27% Share Price Plunge Could Signal Some Risk

The Fabryka Obrabiarek RAFAMET S.A. (WSE:RAF) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 342% in the last year.

In spite of the heavy fall in price, given around half the companies in Poland's Machinery industry have price-to-sales ratios (or "P/S") below 0.7x, you may still consider Fabryka Obrabiarek RAFAMET as a stock to avoid entirely with its 4.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Fabryka Obrabiarek RAFAMET

How Has Fabryka Obrabiarek RAFAMET Performed Recently?

As an illustration, revenue has deteriorated at Fabryka Obrabiarek RAFAMET over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Fabryka Obrabiarek RAFAMET's earnings, revenue and cash flow.

How Is Fabryka Obrabiarek RAFAMET's Revenue Growth Trending?

In order to justify its P/S ratio, Fabryka Obrabiarek RAFAMET would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 38% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 33% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to shrink 5.6% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.

With this information, it's strange that Fabryka Obrabiarek RAFAMET is trading at a higher P/S in comparison. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be extremely difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

What Does Fabryka Obrabiarek RAFAMET's P/S Mean For Investors?

Fabryka Obrabiarek RAFAMET's shares may have suffered, but its P/S remains high. 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.

We've established that Fabryka Obrabiarek RAFAMET currently trades on a much higher than expected P/S since its recent three-year revenues are even worse than the forecasts for a struggling industry. Right now we aren't comfortable with the high P/S as this revenue performance is unlikely to support such positive sentiment for long. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You should always think about risks. Case in point, we've spotted 3 warning signs for Fabryka Obrabiarek RAFAMET you should be aware of, and 2 of them can't be ignored.

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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.