There wouldn't be many who think LightPath Technologies, Inc.'s (NASDAQ:LPTH) price-to-sales (or "P/S") ratio of 2x is worth a mention when the median P/S for the Electronic industry in the United States is similar at about 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
See our latest analysis for LightPath Technologies
How LightPath Technologies Has Been Performing
While the industry has experienced revenue growth lately, LightPath Technologies' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on LightPath Technologies will help you uncover what's on the horizon.Do Revenue Forecasts Match The P/S Ratio?
The only time you'd be comfortable seeing a P/S like LightPath Technologies' is when the company's growth is tracking the industry closely.
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 8.1%. As a result, revenue from three years ago have also fallen 7.1% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Turning to the outlook, the next year should generate growth of 14% as estimated by the three analysts watching the company. With the industry only predicted to deliver 11%, the company is positioned for a stronger revenue result.
With this in consideration, we find it intriguing that LightPath Technologies' P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Final Word
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.
We've established that LightPath Technologies currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.
Don't forget that there may be other risks. For instance, we've identified 4 warning signs for LightPath Technologies that you should be aware of.
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.
What are the risks and opportunities for LightPath Technologies?
LightPath Technologies, Inc. designs, develops, manufactures, and distributes optical components and assemblies.
Rewards
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Revenue is forecast to grow 14.3% per year
Risks
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Does not have a meaningful market cap ($61M)
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Shareholders have been diluted in the past year
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Volatile share price over the past 3 months
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Currently unprofitable and not forecast to become profitable over the next 3 years
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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.
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