There's Reason For Concern Over Ceres Power Holdings plc's (LON:CWR) Price

Ceres Power Holdings plc's (LON:CWR) price-to-sales (or "P/S") ratio of 34.2x may look like a poor investment opportunity when you consider close to half the companies in the Electrical industry in the United Kingdom have P/S ratios below 2.7x. 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.

Check out our latest analysis for Ceres Power Holdings

What Does Ceres Power Holdings' Recent Performance Look Like?

Ceres Power Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Ceres Power Holdings will help you uncover what's on the horizon.

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

Ceres Power Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 28% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 45% per annum as estimated by the twelve analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 133% per year, which is noticeably more attractive.

With this information, we find it concerning that Ceres Power Holdings is trading at a P/S higher than the industry. 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.

What Does Ceres Power Holdings' P/S Mean For Investors?

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.

It comes as a surprise to see Ceres Power Holdings trade at such a high P/S given the revenue forecasts look less than stellar. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Ceres Power Holdings, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Ceres Power Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.