WH Ireland Group plc (LON:WHI) Soars 47% But It's A Story Of Risk Vs Reward

WH Ireland Group plc (LON:WHI) shares have had a really impressive month, gaining 47% after a shaky period beforehand. But the last month did very little to improve the 77% share price decline over the last year.

Although its price has surged higher, WH Ireland Group may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.6x, since almost half of all companies in the Capital Markets industry in the United Kingdom have P/S ratios greater than 2.9x and even P/S higher than 10x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for WH Ireland Group

How WH Ireland Group Has Been Performing

As an illustration, revenue has deteriorated at WH Ireland Group over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on WH Ireland Group will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on WH Ireland Group will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as WH Ireland Group's is when the company's growth is on track to lag the industry decidedly.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 21%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the industry, which is expected to decline by 2.4% over the next year, even worse than the company's recent medium-term annualised revenue decline.

In light of this, the fact WH Ireland Group's P/S sits below the majority of other companies is peculiar but certainly not shocking. There's no guarantee the P/S has found a floor yet with recent revenue going backwards, despite the industry heading down even harder. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares excessively.

What Does WH Ireland Group's P/S Mean For Investors?

Shares in WH Ireland Group have risen appreciably however, its P/S is still subdued. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of WH Ireland Group revealed its narrower three-year contraction in revenue isn't contributing to its P/S anywhere near as much as we would have predicted, given the industry is set to shrink even more. When we see better than average revenue growth but a lower than average P/S, we must assume that potential risks are what might be placing significant pressure on the P/S ratio. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. While recent medium-term revenue trends suggest that the risk of a price decline is low, investors appear to perceive a possibility of revenue volatility in the future.

It is also worth noting that we have found 3 warning signs for WH Ireland Group (2 shouldn't be ignored!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.