Spirox Corporation's (TWSE:3055) Popularity With Investors Under Threat As Stock Sinks 27%

Spirox Corporation (TWSE:3055) shareholders won't be pleased to see that the share price has had a very rough month, dropping 27% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 76% in the last year.

Although its price has dipped substantially, you could still be forgiven for thinking Spirox is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.4x, considering almost half the companies in Taiwan's Semiconductor industry have P/S ratios below 3.3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Spirox

What Does Spirox's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Spirox's revenue has gone into reverse gear, which is not great. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 35% decrease to the company's top line. As a result, revenue from three years ago have also fallen 43% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 1.9% during the coming year according to the one analyst following the company. With the industry predicted to deliver 26% growth, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Spirox's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Spirox's P/S Mean For Investors?

Spirox's shares may have suffered, but its P/S remains high. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Spirox currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Before you settle on your opinion, we've discovered 1 warning sign for Spirox that you should be aware of.

If these risks are making you reconsider your opinion on Spirox, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.