What Creo Medical Group PLC's (LON:CREO) 28% Share Price Gain Is Not Telling You

Creo Medical Group PLC (LON:CREO) shareholders are no doubt pleased to see that the share price has bounced 28% in the last month, although it is still struggling to make up recently lost ground. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 55% share price drop in the last twelve months.

In spite of the firm bounce in price, there still wouldn't be many who think Creo Medical Group's price-to-sales (or "P/S") ratio of 2.7x is worth a mention when the median P/S in the United Kingdom's Medical Equipment industry is similar at about 2.6x. 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.

See our latest analysis for Creo Medical Group

How Creo Medical Group Has Been Performing

Recent times haven't been great for Creo Medical Group as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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Do Revenue Forecasts Match The P/S Ratio?

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

If we review the last year of revenue growth, the company posted a worthy increase of 3.4%. The latest three year period has also seen an excellent 36% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 7.7% per annum as estimated by the three analysts watching the company. With the industry predicted to deliver 9.2% growth per year, that's a disappointing outcome.

With this in consideration, we think it doesn't make sense that Creo Medical Group's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On Creo Medical Group's P/S

Its shares have lifted substantially and now Creo Medical Group's P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

While Creo Medical Group's P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue 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 we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You always need to take note of risks, for example - Creo Medical Group has 4 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Creo Medical Group, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.