There's Reason For Concern Over The Parkmead Group plc's (LON:PMG) Massive 27% Price Jump

The Parkmead Group plc (LON:PMG) shares have continued their recent momentum with a 27% gain in the last month alone. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 53% share price drop in the last twelve months.

After such a large jump in price, given close to half the companies operating in the United Kingdom's Oil and Gas industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider Parkmead Group as a stock to potentially avoid with its 1.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Parkmead Group

What Does Parkmead Group's Recent Performance Look Like?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Parkmead Group has been doing quite well of late. It seems that many are expecting the company to continue defying the broader industry adversity, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Parkmead Group's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. The latest three year period has also seen an excellent 262% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 58% over the next year. Meanwhile, the broader industry is forecast to expand by 1.8%, which paints a poor picture.

In light of this, it's alarming that Parkmead Group's P/S sits above the majority of other companies. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh heavily on the share price eventually.

What We Can Learn From Parkmead Group's P/S?

The large bounce in Parkmead Group's shares has lifted the company's P/S handsomely. 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.

We've established that Parkmead Group currently trades on a much higher than expected P/S for a company whose revenues are forecast to decline. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. At these price levels, investors should remain cautious, particularly if things don't improve.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Parkmead Group (1 makes us a bit uncomfortable!) that you need to be mindful 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).

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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.