The Cato Corporation (NYSE:CATO) Shares May Have Slumped 38% But Getting In Cheap Is Still Unlikely

The Cato Corporation (NYSE:CATO) shares have had a horrible month, losing 38% 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 46% in that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Cato's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Specialty Retail industry in the United States is also close to 0.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Cato

How Cato Has Been Performing

As an illustration, revenue has deteriorated at Cato over the last year, which is not ideal at all. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for Cato, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Cato?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Cato's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 6.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 11% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 4.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's somewhat alarming that Cato's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Cato looks to be in line with the rest of the Specialty Retail industry. 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 Cato currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Cato (of which 2 make us uncomfortable!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.