ALM Equity AB (publ) (STO:ALM) Stock's 27% Dive Might Signal An Opportunity But It Requires Some Scrutiny

ALM Equity AB (publ) (STO:ALM) shareholders that were waiting for something to happen have been dealt a blow with a 27% share price drop in the last month. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 69% loss during that time.

Following the heavy fall in price, ALM Equity may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.4x, considering almost half of all companies in the Real Estate industry in Sweden have P/S ratios greater than 5.2x and even P/S higher than 8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

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Check out our latest analysis for ALM Equity

How ALM Equity Has Been Performing

ALM Equity certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Keen to find out how analysts think ALM Equity's future stacks up against the industry? In that case, our free report is a great place to start.

How Is ALM Equity's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. Still, revenue has fallen 61% in total from three years ago, which is quite disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Turning to the outlook, the next year should generate growth of 7.9% as estimated by the dual analysts watching the company. That's shaping up to be materially higher than the 5.2% growth forecast for the broader industry.

With this information, we find it odd that ALM Equity is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

Having almost fallen off a cliff, ALM Equity's share price has pulled its P/S way down as well. 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.

To us, it seems ALM Equity currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. It appears the market could be anticipating revenue instability, because these conditions should normally provide a boost to the share price.

We don't want to rain on the parade too much, but we did also find 1 warning sign for ALM Equity that you need to be mindful of.

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.