Charles & Colvard, Ltd.'s (NASDAQ:CTHR) 26% Dip In Price Shows Sentiment Is Matching Revenues

To the annoyance of some shareholders, Charles & Colvard, Ltd. (NASDAQ:CTHR) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 77% loss during that time.

Since its price has dipped substantially, considering around half the companies operating in the United States' Luxury industry have price-to-sales ratios (or "P/S") above 0.8x, you may consider Charles & Colvard as an solid investment opportunity with its 0.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Charles & Colvard

What Does Charles & Colvard's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Charles & Colvard over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 Charles & Colvard's earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Charles & Colvard?

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

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 30%. This means it has also seen a slide in revenue over the longer-term as revenue is down 30% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.8% shows it's an unpleasant look.

With this in mind, we understand why Charles & Colvard'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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

Charles & Colvard's recently weak share price has pulled its P/S back below other Luxury companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It's no surprise that Charles & Colvard maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. 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.

There are also other vital risk factors to consider and we've discovered 4 warning signs for Charles & Colvard (3 are a bit concerning!) that you should be aware of before investing here.

If these risks are making you reconsider your opinion on Charles & Colvard, 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.