Lacklustre Performance Is Driving Strax AB (publ)'s (STO:STRAX) 27% Price Drop

To the annoyance of some shareholders, Strax AB (publ) (STO:STRAX) shares are down a considerable 27% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 73% share price decline.

Following the heavy fall in price, when close to half the companies operating in Sweden's Consumer Durables industry have price-to-sales ratios (or "P/S") above 0.8x, you may consider Strax as an enticing stock to check out with its 0.1x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Strax

What Does Strax's Recent Performance Look Like?

For instance, Strax's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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.

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 Strax's earnings, revenue and cash flow.

How Is Strax's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Strax's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 69%. As a result, revenue from three years ago have also fallen 87% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for a contraction of 3.7% shows the industry is more attractive on an annualised basis regardless.

In light of this, it's understandable that Strax's P/S sits below the majority of other companies. However, when revenue shrink rapidly P/S often shrinks too, which could set up shareholders for future disappointment regardless. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares heavily.

What We Can Learn From Strax's P/S?

Strax's recently weak share price has pulled its P/S back below other Consumer Durables companies. 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.

As expected, our analysis of Strax confirms that the company's severe contraction in revenue over the past three-year years is a major contributor to its lower than industry P/S, given the industry is set to decline less. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Although, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. For now though, it's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 5 warning signs for Strax (of which 4 are a bit unpleasant!) you should know about.

If you're unsure about the strength of Strax'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.