Lohilo Foods AB (publ)'s (STO:LOHILO) 26% Share Price Plunge Could Signal Some Risk

The Lohilo Foods AB (publ) (STO:LOHILO) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 49% in that time.

Although its price has dipped substantially, there still wouldn't be many who think Lohilo Foods' price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Sweden's Food industry is similar at about 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Lohilo Foods

What Does Lohilo Foods' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Lohilo Foods over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Lohilo Foods, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Lohilo Foods?

In order to justify its P/S ratio, Lohilo Foods would need to produce growth that's similar to 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 22%. The last three years don't look nice either as the company has shrunk revenue by 22% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

This is in contrast to the rest of the industry, which is expected to decline by 3.1% over the next year, or less than the company's recent medium-term annualised revenue decline.

With this information, it's perhaps strange that Lohilo Foods is trading at a fairly similar P/S in comparison. In general, when revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

What We Can Learn From Lohilo Foods' P/S?

Following Lohilo Foods' share price tumble, its P/S is just clinging on to the industry median P/S. 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 examination of Lohilo Foods revealed its sharp three-year contraction in revenue isn't impacting its P/S as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the moderate P/S lower. In addition, we would be concerned whether the company can even maintain its medium-term level of performance under these tough industry conditions. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Before you take the next step, you should know about the 4 warning signs for Lohilo Foods that we have uncovered.

If you're unsure about the strength of Lohilo Foods' 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.