There's Reason For Concern Over Ceres Power Holdings plc's (LON:CWR) Massive 45% Price Jump

Ceres Power Holdings plc (LON:CWR) shareholders would be excited to see that the share price has had a great month, posting a 45% gain and recovering from prior weakness. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 6.6% over the last year.

After such a large jump in price, you could be forgiven for thinking Ceres Power Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.3x, considering almost half the companies in the United Kingdom's Electrical industry have P/S ratios below 1.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Ceres Power Holdings

How Ceres Power Holdings Has Been Performing

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. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Ceres Power Holdings.

Is There Enough Revenue Growth Forecasted For Ceres Power Holdings?

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

If we review the last year of revenue growth, the company posted a terrific increase of 80%. Pleasingly, revenue has also lifted 33% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 34% per year during the coming three years according to the ten analysts following the company. With the industry predicted to deliver 76% growth per 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.

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

The strong share price surge has lead to Ceres Power Holdings' P/S soaring as well. 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.

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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with Ceres Power Holdings (including 1 which is potentially serious).

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.