When you see that almost half of the companies in the Semiconductor industry in Singapore have price-to-sales ratios (or "P/S") below 0.7x, Advanced Systems Automation Limited (Catalist:5TY) looks to be giving off some sell signals with its 1.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
View our latest analysis for Advanced Systems Automation
How Advanced Systems Automation Has Been Performing
For example, consider that Advanced Systems Automation's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.
Although there are no analyst estimates available for Advanced Systems Automation, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Do Revenue Forecasts Match The High P/S Ratio?
Advanced Systems Automation's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.
Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 14% shows it's noticeably less attractive.
With this information, we find it concerning that Advanced Systems Automation is trading at a P/S higher than the industry. It seems most investors are ignoring the fairly limited recent growth rates 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 heavily on the share price eventually.
The Key Takeaway
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
Our examination of Advanced Systems Automation revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.