Shearwater Group plc (LON:SWG) Not Doing Enough For Some Investors As Its Shares Slump 29%
The Shearwater Group plc (LON:SWG) share price has fared very poorly over the last month, falling by a substantial 29%. For any long-term shareholders, the last month ends a year to forget by locking in a 54% share price decline.
Following the heavy fall in price, Shearwater Group may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.4x, considering almost half of all companies in the Software industry in the United Kingdom have P/S ratios greater than 2.7x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Shearwater Group
How Has Shearwater Group Performed Recently?
Shearwater Group could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Shearwater Group.
Is There Any Revenue Growth Forecasted For Shearwater Group?
The only time you'd be truly comfortable seeing a P/S as depressed as Shearwater Group's is when the company's growth is on track to lag the industry decidedly.
If we review the last year of revenue growth, the company posted a terrific increase of 16%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.
Shifting to the future, estimates from the two analysts covering the company suggest revenue growth is heading into negative territory, declining 6.9% over the next year. With the industry predicted to deliver 15% growth, that's a disappointing outcome.
In light of this, it's understandable that Shearwater Group's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
What Does Shearwater Group's P/S Mean For Investors?
Shearwater Group's P/S looks about as weak as its stock price lately. 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.
As we suspected, our examination of Shearwater Group's 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, Shearwater Group's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Having said that, be aware Shearwater Group is showing 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable.
If you're unsure about the strength of Shearwater Group's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.
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