Improved Revenues Required Before Prime Electronics & Satellitics Inc. (TWSE:6152) Stock's 31% Jump Looks Justified

Prime Electronics & Satellitics Inc. (TWSE:6152) shares have had a really impressive month, gaining 31% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 27%.

Although its price has surged higher, Prime Electronics & Satellitics' price-to-sales (or "P/S") ratio of 1x might still make it look like a buy right now compared to the Communications industry in Taiwan, where around half of the companies have P/S ratios above 2.2x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Prime Electronics & Satellitics

How Prime Electronics & Satellitics Has Been Performing

As an illustration, revenue has deteriorated at Prime Electronics & Satellitics 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. Those who are bullish on Prime Electronics & Satellitics will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Prime Electronics & Satellitics' earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as low as Prime Electronics & Satellitics' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 44% decrease to the company's top line. As a result, revenue from three years ago have also fallen 28% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 14% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's understandable that Prime Electronics & Satellitics' P/S would sit below the majority of other companies. 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What We Can Learn From Prime Electronics & Satellitics' P/S?

Despite Prime Electronics & Satellitics' 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 Prime Electronics & Satellitics 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 1 warning sign for Prime Electronics & Satellitics that you need to take into consideration.

If these risks are making you reconsider your opinion on Prime Electronics & Satellitics, 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.