EDOM Technology Co., Ltd.'s (TWSE:3048) Price Is Right But Growth Is Lacking After Shares Rocket 62%

The EDOM Technology Co., Ltd. (TWSE:3048) share price has done very well over the last month, posting an excellent gain of 62%. The last 30 days bring the annual gain to a very sharp 41%.

In spite of the firm bounce in price, EDOM Technology may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.1x, since almost half of all companies in the Electronic industry in Taiwan have P/S ratios greater than 1.7x and even P/S higher than 4x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for EDOM Technology

How EDOM Technology Has Been Performing

For instance, EDOM Technology'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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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 EDOM Technology's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

In order to justify its P/S ratio, EDOM Technology 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 5.4%. The last three years don't look nice either as the company has shrunk revenue by 3.4% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 16% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why EDOM Technology's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From EDOM Technology's P/S?

Despite EDOM Technology's share price climbing recently, its P/S still lags most other companies. 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.

It's no surprise that EDOM Technology maintains its low P/S off the back of its sliding revenue over the medium-term. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

We don't want to rain on the parade too much, but we did also find 6 warning signs for EDOM Technology (2 don't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of EDOM Technology'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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com