More Unpleasant Surprises Could Be In Store For Eskimos S.A.'s (WSE:ESK) Shares After Tumbling 30%

Eskimos S.A. (WSE:ESK) shares have retraced a considerable 30% in the last month, reversing a fair amount of their solid recent performance. Looking at the bigger picture, even after this poor month the stock is up 84% in the last year.

Even after such a large drop in price, there still wouldn't be many who think Eskimos' price-to-sales (or "P/S") ratio of 0.1x is worth a mention when the median P/S in Poland's Food industry is similar at about 0.4x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Eskimos

How Has Eskimos Performed Recently?

As an illustration, revenue has deteriorated at Eskimos over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Eskimos?

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

Retrospectively, the last year delivered a frustrating 42% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 33% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 2.6% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Eskimos' P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Eskimos looks to be in line with the rest of the Food industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at Eskimos revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You should always think about risks. Case in point, we've spotted 3 warning signs for Eskimos you should be aware of.

If you're unsure about the strength of Eskimos' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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

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.