Carclo plc (LON:CAR) Might Not Be As Mispriced As It Looks After Plunging 26%

To the annoyance of some shareholders, Carclo plc (LON:CAR) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The good news is that in the last year, the stock has shone bright like a diamond, gaining 178%.

After such a large drop in price, Carclo may be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.1x, considering almost half of all companies in the Chemicals industry in the United Kingdom have P/S ratios greater than 1.1x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Carclo

What Does Carclo's P/S Mean For Shareholders?

The recently shrinking revenue for Carclo has been in line with the industry. One possibility is that the P/S ratio is low because investors think the company's revenue may begin to slide even faster. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. At the very least, you'd be hoping that revenue doesn't fall off a cliff if your plan is to pick up some stock while it's out of favour.

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

How Is Carclo's Revenue Growth Trending?

In order to justify its P/S ratio, Carclo would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 8.3% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 9.0% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 10% during the coming year according to the lone analyst following the company. Meanwhile, the broader industry is forecast to contract by 13%, which would indicate the company is doing very well.

With this in mind, we find it intriguing that Carclo's P/S falls short of its industry peers. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.

The Bottom Line On Carclo's P/S

Carclo's P/S has taken a dip along with its share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our look into Carclo's analyst forecasts has shown that it could be trading at a significant discount in terms of P/S, as it is expected to far outperform the industry. When we see a superior revenue outlook with some actual growth, we can only assume investor uncertainty is what's been suppressing the P/S figures. Amidst challenging industry conditions, a key concern is whether the company can sustain its superior revenue growth trajectory. It appears many are indeed anticipating revenue instability, because the company's current prospects should normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Carclo (of which 1 is a bit concerning!) you should know about.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.