Vactronics technologies inc. (TWSE:6742) May Have Run Too Fast Too Soon With Recent 27% Price Plummet

Vactronics technologies inc. (TWSE:6742) shares have had a horrible month, losing 27% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 34% in that time.

Even after such a large drop in price, given around half the companies in Taiwan's Electronic industry have price-to-sales ratios (or "P/S") below 1.8x, you may still consider Vactronics technologies as a stock to avoid entirely with its 5.8x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Vactronics technologies

What Does Vactronics technologies' P/S Mean For Shareholders?

Vactronics technologies has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Vactronics technologies will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Vactronics technologies?

The only time you'd be truly comfortable seeing a P/S as steep as Vactronics technologies' is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 52% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 36% shows it's noticeably less attractive.

In light of this, it's alarming that Vactronics technologies' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Vactronics technologies' P/S

Even after such a strong price drop, Vactronics technologies' P/S still exceeds the industry median significantly. 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.

The fact that Vactronics technologies currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you take the next step, you should know about the 3 warning signs for Vactronics technologies (2 don't sit too well with us!) that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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

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.