Capita plc's (LON:CPI) Shares Bounce 28% But Its Business Still Trails The Industry

Capita plc (LON:CPI) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 48%.

In spite of the firm bounce in price, Capita may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.2x, considering almost half of all companies in the Professional Services industry in the United Kingdom have P/S ratios greater than 1x and even P/S higher than 3x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for Capita

How Has Capita Performed Recently?

Capita hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Capita's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 9.0%. As a result, revenue from three years ago have also fallen 24% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 1.4% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 6.6% per annum, which is noticeably more attractive.

With this in consideration, its clear as to why Capita's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

Capita's stock price has surged recently, but its but its P/S still remains modest. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Capita's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Capita (2 are significant!) that you should be aware of before investing here.

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.

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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.