Strax AB (publ) (STO:STRAX) Looks Inexpensive After Falling 29% But Perhaps Not Attractive Enough

Strax AB (publ) (STO:STRAX) shares have retraced a considerable 29% in the last month, reversing a fair amount of their solid recent performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 76% loss during that time.

Since its price has dipped substantially, given about 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 attractive investment with its 0.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Strax

How Has Strax Performed Recently?

As an illustration, revenue has deteriorated at Strax over the last year, which is not ideal at all. 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.

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

Is There Any Revenue Growth Forecasted For Strax?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 71%. The last three years don't look nice either as the company has shrunk revenue by 73% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to shrink 7.0% in the next 12 months, the company's downward momentum is still inferior based on recent medium-term annualised revenue results.

With this in consideration, it's no surprise that Strax's P/S falls short of its industry peers. Nonetheless, with revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. 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?

The southerly movements of Strax's shares means its P/S is now sitting at a pretty low level. 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.

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. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Although, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. In the meantime, unless the company's relative performance improves, the share price will hit a barrier around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Strax, and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.