A Piece Of The Puzzle Missing From Carclo plc's (LON:CAR) 26% Share Price Climb

Carclo plc (LON:CAR) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 61% in the last year.

In spite of the firm bounce in price, Carclo's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Chemicals industry in the United Kingdom, where around half of the companies have P/S ratios above 1.7x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Carclo

What Does Carclo's Recent Performance Look Like?

Carclo hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 8.6%. This means it has also seen a slide in revenue over the longer-term as revenue is down 5.7% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue growth will be highly resilient over the next three years growing by 5.7% per annum. That would be an excellent outcome when the industry is expected to decline by 8.8% per year.

In light of this, it's quite peculiar that Carclo's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

Despite Carclo's share price climbing recently, its P/S still lags most other companies. 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 Carclo's analyst forecasts revealed that its superior revenue outlook against a shaky industry isn't contributing to its P/S anywhere near as much as we would have predicted. We believe there could be some underlying risks that are keeping the P/S modest in the context of above-average revenue growth. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader industry turmoil. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Carclo (2 don't sit too well with us!) that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.