Unpleasant Surprises Could Be In Store For Melrose Industries PLC's (LON:MRO) Shares

There wouldn't be many who think Melrose Industries PLC's (LON:MRO) price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S for the Aerospace & Defense industry in the United Kingdom is similar at about 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Melrose Industries

How Has Melrose Industries Performed Recently?

With revenue growth that's superior to most other companies of late, Melrose Industries has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

How Is Melrose Industries' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Melrose Industries' is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 31% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 19% each year during the coming three years according to the eleven analysts following the company. Meanwhile, the broader industry is forecast to expand by 5.1% per annum, which paints a poor picture.

With this information, we find it concerning that Melrose Industries is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. 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 negative growth outlook.

The Key Takeaway

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.

While Melrose Industries' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

You always need to take note of risks, for example - Melrose Industries has 1 warning sign we think you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.