Franklin Wireless Corp. (NASDAQ:FKWL) May Have Run Too Fast Too Soon With Recent 25% Price Plummet

Franklin Wireless Corp. (NASDAQ:FKWL) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 69% in the last year.

In spite of the heavy fall in price, it's still not a stretch to say that Franklin Wireless' price-to-sales (or "P/S") ratio of 1.3x right now seems quite "middle-of-the-road" compared to the Communications industry in the United States, seeing as it matches the P/S ratio of the wider industry. 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.

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Check out our latest analysis for Franklin Wireless

How Has Franklin Wireless Performed Recently?

For example, consider that Franklin Wireless' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. 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.

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

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

In order to justify its P/S ratio, Franklin Wireless would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 8.3% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 28% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.4% shows it's an unpleasant look.

In light of this, it's somewhat alarming that Franklin Wireless' 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

Following Franklin Wireless' share price tumble, its P/S is just clinging on to the industry median P/S. 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.

We find it unexpected that Franklin Wireless trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Franklin Wireless (at least 1 which is concerning), and understanding them should be part of your investment process.

If you're unsure about the strength of Franklin Wireless' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.