Methode Electronics, Inc. (NYSE:MEI) shares have had a really impressive month, gaining 32% after a shaky period beforehand. But the last month did very little to improve the 59% share price decline over the last year.

Although its price has surged higher, Methode Electronics may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Electronic industry in the United States have P/S ratios greater than 2x and even P/S higher than 4x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

What Does Methode Electronics' Recent Performance Look Like?

Methode Electronics' negative revenue growth of late has neither been better nor worse than most other companies. It might be that many expect the company's revenue performance to degrade further, which has repressed the P/S. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. In saying that, existing shareholders may feel hopeful about the share price if the company's revenue continues tracking the industry.

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

Methode Electronics' 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, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 2.5%. Regardless, revenue has managed to lift by a handy 14% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 3.9% as estimated by the three analysts watching the company. That's not great when the rest of the industry is expected to grow by 7.2%.

With this information, we are not surprised that Methode Electronics is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift Methode Electronics' P/S close to the industry median. 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.

As we suspected, our examination of Methode Electronics' analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Methode Electronics' poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for Methode Electronics that you should be aware of.

If these risks are making you reconsider your opinion on Methode Electronics, explore our interactive list of high quality stocks to get an idea of what else is out there.

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