WiseTech Global Limited's (ASX:WTC) Shares Climb 27% But Its Business Is Yet to Catch Up

Those holding WiseTech Global Limited (ASX:WTC) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Notwithstanding the latest gain, the annual share price return of 3.0% isn't as impressive.

Since its price has surged higher, WiseTech Global's price-to-sales (or "P/S") ratio of 29.1x might make it look like a strong sell right now compared to other companies in the Software industry in Australia, where around half of the companies have P/S ratios below 3.3x and even P/S below 1.2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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How Has WiseTech Global Performed Recently?

With revenue growth that's inferior to most other companies of late, WiseTech Global has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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How Is WiseTech Global's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 75% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 27% per year over the next three years. With the industry predicted to deliver 41% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that WiseTech Global's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Final Word

Shares in WiseTech Global have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Despite analysts forecasting some poorer-than-industry revenue growth figures for WiseTech Global, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for WiseTech Global with six simple checks.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.