Latham Group, Inc. (NASDAQ:SWIM) shareholders won't be pleased to see that the share price has had a very rough month, dropping 28% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 47% in the last year.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Latham Group's P/S ratio of 1.2x, since the median price-to-sales (or "P/S") ratio for the Leisure industry in the United States is also close to 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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What Does Latham Group's P/S Mean For Shareholders?

Latham Group's negative revenue growth of late has neither been better nor worse than most other companies. Perhaps the market is expecting future revenue performance to continue matching the industry, which has kept the P/S in line with expectations. 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 probably aren't too pessimistic about the share price if the company's revenue continues tracking the industry.

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Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Latham Group would need to produce growth that's similar to 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 10%. The last three years don't look nice either as the company has shrunk revenue by 19% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 6.4% each year as estimated by the seven analysts watching the company. That's shaping up to be materially higher than the 3.4% per year growth forecast for the broader industry.

With this information, we find it interesting that Latham Group is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What Does Latham Group's P/S Mean For Investors?

Latham Group's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that Latham Group currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Latham Group , and understanding should be part of your investment process.

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

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