Revenues Not Telling The Story For HWA AG (ETR:H9W) After Shares Rise 27%

Despite an already strong run, HWA AG (ETR:H9W) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Even after such a large jump in price, it's still not a stretch to say that HWA's price-to-sales (or "P/S") ratio of 0.5x right now seems quite "middle-of-the-road" compared to the Auto industry in Germany, where the median P/S ratio is around 0.4x. 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.

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See our latest analysis for HWA

How Has HWA Performed Recently?

As an illustration, revenue has deteriorated at HWA over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

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 HWA's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

In order to justify its P/S ratio, HWA would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. As a result, revenue from three years ago have also fallen 15% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 0.3% shows it's an unpleasant look.

With this information, we find it concerning that HWA is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh on the share price eventually.

What Does HWA's P/S Mean For Investors?

HWA's stock has a lot of momentum behind it lately, which has brought its P/S level with 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.

Our look at HWA 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. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 4 warning signs for HWA (2 don't sit too well with us!) that we have uncovered.

If you're unsure about the strength of HWA's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.