What Rubicon Water Limited's (ASX:RWL) P/S Is Not Telling You

It's not a stretch to say that Rubicon Water Limited's (ASX:RWL) price-to-sales (or "P/S") ratio of 1.2x right now seems quite "middle-of-the-road" for companies in the Electronic industry in Australia, where the median P/S ratio is around 1.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Rubicon Water

How Rubicon Water Has Been Performing

We'd have to say that with no tangible growth over the last year, Rubicon Water's revenue has been unimpressive. It might be that many expect the uninspiring revenue performance to only match most other companies at best over the coming period, which has kept the P/S from rising. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Rubicon Water's earnings, revenue and cash flow.

How Is Rubicon Water's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Rubicon Water's to be considered reasonable.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 19% drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 27% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Rubicon Water is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Rubicon Water's P/S?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look at Rubicon Water revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

You need to take note of risks, for example - Rubicon Water has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.