Ricardo plc's (LON:RCDO) 37% Share Price Plunge Could Signal Some Risk

The Ricardo plc (LON:RCDO) share price has fared very poorly over the last month, falling by a substantial 37%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 39% in that time.

Although its price has dipped substantially, there still wouldn't be many who think Ricardo's price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S in the United Kingdom's Professional Services industry is similar at about 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Ricardo

How Ricardo Has Been Performing

With revenue growth that's superior to most other companies of late, Ricardo 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.

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

Is There Some Revenue Growth Forecasted For Ricardo?

In order to justify its P/S ratio, Ricardo would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.6% last year. The latest three year period has also seen an excellent 38% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 1.7% per annum during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 6.8% growth per year, that's a disappointing outcome.

With this information, we find it concerning that Ricardo is trading at a fairly similar P/S compared to the industry. 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 negative growth outlook.

What We Can Learn From Ricardo's P/S?

Ricardo's plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

It appears that Ricardo currently trades on a higher than expected P/S for a company whose revenues are forecast to 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 poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.

You should always think about risks. Case in point, we've spotted 3 warning signs for Ricardo you should be aware of.

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).

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.