Rubicon Water Limited (ASX:RWL) Held Back By Insufficient Growth Even After Shares Climb 50%

Rubicon Water Limited (ASX:RWL) shares have had a really impressive month, gaining 50% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.

In spite of the firm bounce in price, Rubicon Water may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.8x, considering almost half of all companies in the Electronic industry in Australia have P/S ratios greater than 2x and even P/S higher than 10x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for Rubicon Water

What Does Rubicon Water's Recent Performance Look Like?

Revenue has risen firmly for Rubicon Water recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. Those who are bullish on Rubicon Water will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Rubicon Water will help you shine a light on its historical performance.

How Is Rubicon Water's Revenue Growth Trending?

Rubicon Water's 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, we see that the company grew revenue by an impressive 18% last year. The latest three year period has also seen a 5.8% overall rise in revenue, aided extensively by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 99% shows it's noticeably less attractive.

In light of this, it's understandable that Rubicon Water's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Rubicon Water's P/S close to the industry median. 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.

Our examination of Rubicon Water confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Rubicon Water (at least 2 which can't be ignored), and understanding them should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.