Natural Alternatives International, Inc.'s (NASDAQ:NAII) Shares Bounce 35% But Its Business Still Trails The Industry

Natural Alternatives International, Inc. (NASDAQ:NAII) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

Even after such a large jump in price, it would still be understandable if you think Natural Alternatives International is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.2x, considering almost half the companies in the United States' Personal Products industry have P/S ratios above 1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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See our latest analysis for Natural Alternatives International

How Natural Alternatives International Has Been Performing

Revenue has risen firmly for Natural Alternatives International recently, which is pleasing to see. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. 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.

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

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

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

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 24% drop in revenue in aggregate. 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 5.0% shows it's an unpleasant look.

With this information, we are not surprised that Natural Alternatives International is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

The latest share price surge wasn't enough to lift Natural Alternatives International's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Natural Alternatives International confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You need to take note of risks, for example - Natural Alternatives International has 3 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

If these risks are making you reconsider your opinion on Natural Alternatives International, 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.