Lacklustre Performance Is Driving Varex Imaging Corporation's (NASDAQ:VREX) 32% Price Drop

To the annoyance of some shareholders, Varex Imaging Corporation (NASDAQ:VREX) shares are down a considerable 32% 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 51% loss during that time.

Following the heavy fall in price, Varex Imaging's price-to-sales (or "P/S") ratio of 0.4x might make it look like a strong buy right now compared to the wider Medical Equipment industry in the United States, where around half of the companies have P/S ratios above 3.1x and even P/S above 7x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

We've discovered 2 warning signs about Varex Imaging. View them for free.

See our latest analysis for Varex Imaging

What Does Varex Imaging's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Varex Imaging's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Varex Imaging will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Varex Imaging?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Varex Imaging'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 6.4%. This means it has also seen a slide in revenue over the longer-term as revenue is down 2.3% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 1.6% as estimated by the five analysts watching the company. With the industry predicted to deliver 11% growth, the company is positioned for a weaker revenue result.

With this in consideration, its clear as to why Varex Imaging's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

Varex Imaging's P/S looks about as weak as its stock price lately. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Varex Imaging's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. It's hard to see the share price rising strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Varex Imaging (of which 1 is potentially serious!) you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.