There's Reason For Concern Over Funding Circle Holdings plc's (LON:FCH) Massive 31% Price Jump

Despite an already strong run, Funding Circle Holdings plc (LON:FCH) shares have been powering on, with a gain of 31% in the last thirty days. The annual gain comes to 186% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in the United Kingdom's Consumer Finance industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Funding Circle Holdings as a stock probably not worth researching with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Funding Circle Holdings

What Does Funding Circle Holdings' Recent Performance Look Like?

Recent times have been advantageous for Funding Circle Holdings as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Funding Circle Holdings' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 8.0%. This was backed up an excellent period prior to see revenue up by 62% 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 8.1% per annum during the coming three years according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 15% each year, which is noticeably more attractive.

With this information, we find it concerning that Funding Circle Holdings is trading at a P/S higher than 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 growth outlook.

What We Can Learn From Funding Circle Holdings' P/S?

Funding Circle Holdings' P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Funding Circle Holdings trade at such a high P/S given the revenue forecasts look less than stellar. 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. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Funding Circle Holdings that you should be aware of.

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.