The Koss Corporation (NASDAQ:KOSS) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. Indeed, the recent drop has reduced its annual gain to a relatively sedate 4.3% over the last twelve months.

Even after such a large drop in price, you could still be forgiven for thinking Koss is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.9x, considering almost half the companies in the United States' Consumer Durables industry have P/S ratios below 0.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

What Does Koss' Recent Performance Look Like?

For example, consider that Koss' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

How Is Koss' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Koss' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 13% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 31% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 4.5% shows it's an unpleasant look.

With this information, we find it concerning that Koss is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

Even after such a strong price drop, Koss' P/S still exceeds the industry median significantly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Koss revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such 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 Koss (at least 1 which is potentially serious), and understanding them should be part of your investment process.

If you're unsure about the strength of Koss' 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com