The Optical Cable Corporation (NASDAQ:OCC) share price has fared very poorly over the last month, falling by a substantial 25%.    Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 27% share price drop.  

Following the heavy fall in price, it would be understandable if you think Optical Cable is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.3x, considering almost half the companies in the United States' Communications industry have P/S ratios above 0.9x.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

Check out our latest analysis for Optical Cable

NasdaqGM:OCC Price to Sales Ratio vs Industry October 19th 2023

How Optical Cable Has Been Performing

Optical Cable has been doing a good job lately as it's been growing revenue at a solid pace.   Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed.  Those who are bullish on Optical Cable will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.    

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

How Is Optical Cable's Revenue Growth Trending?  

Optical Cable's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.  

Taking a look back first, we see that the company grew revenue by an impressive 15% last year.    As a result, it also grew revenue by 26% in total over the last three years.  So we can start by confirming that the company has actually done a good job of growing revenue over that time.  

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 4.6% shows it's noticeably more attractive.

With this information, we find it odd that Optical Cable is trading at a P/S lower than the industry.  Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.  

The Key Takeaway

Optical Cable's P/S has taken a dip along with its share price.      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 Optical Cable revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations.  When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio.  While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.    

And what about other risks? Every company has them, and we've spotted   3 warning signs for Optical Cable  (of which 1 is a bit concerning!) you should know about.  

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.

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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.