Optimistic Investors Push Ceres Power Holdings plc (LON:CWR) Shares Up 27% But Growth Is Lacking

Those holding Ceres Power Holdings plc (LON:CWR) 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. But the last month did very little to improve the 67% share price decline over the last year.

Since its price has surged higher, you could be forgiven for thinking Ceres Power Holdings is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.3x, considering almost half the companies in the United Kingdom's Electrical industry have P/S ratios below 1.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 2 warning signs investors should be aware of before investing in Ceres Power Holdings. Read for free now.

View our latest analysis for Ceres Power Holdings

What Does Ceres Power Holdings' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Ceres Power Holdings has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Ceres Power Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

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

The only time you'd be truly comfortable seeing a P/S as high as Ceres Power Holdings' is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 132% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 69% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 7.7% each year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 48% growth each year, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Ceres Power Holdings' P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Key Takeaway

The large bounce in Ceres Power Holdings' shares has lifted the company's P/S handsomely. 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.

We've concluded that Ceres Power Holdings currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Ceres Power Holdings (1 doesn't sit too well with us) you should be aware of.

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.