There's Reason For Concern Over Ceres Power Holdings plc's (LON:CWR) Massive 29% Price Jump

Ceres Power Holdings plc (LON:CWR) shares have continued their recent momentum with a 29% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 24% over that time.

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 5.4x, considering almost half the companies in the United Kingdom's Electrical industry have P/S ratios below 1.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Ceres Power Holdings

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

Ceres Power Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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.

Do Revenue Forecasts Match The High P/S Ratio?

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.

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. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.1% per year during the coming three years according to the nine analysts following the company. With the industry predicted to deliver 43% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Ceres Power Holdings' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Shares in Ceres Power Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Ceres Power Holdings, this doesn't appear to be impacting the P/S in the slightest. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Ceres Power Holdings has 2 warning signs (and 1 which is potentially serious) 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.