Slammed 32% Ebiquity plc (LON:EBQ) Screens Well Here But There Might Be A Catch

To the annoyance of some shareholders, Ebiquity plc (LON:EBQ) shares are down a considerable 32% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 43% share price drop.

After such a large drop in price, given about half the companies operating in the United Kingdom's Media industry have price-to-sales ratios (or "P/S") above 1.2x, you may consider Ebiquity as an attractive investment with its 0.4x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Ebiquity

How Has Ebiquity Performed Recently?

Ebiquity could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is Ebiquity's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Ebiquity's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a decent 6.8% gain to the company's revenues. Pleasingly, revenue has also lifted 43% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should demonstrate some strength in company's business, generating growth of 4.6% each year as estimated by the dual analysts watching the company. While this isn't a particularly impressive figure, it should be noted that the the industry is expected to decline by 2.5% per year.

With this in consideration, we find it intriguing that Ebiquity's P/S falls short of its industry peers. It looks like most investors aren't convinced at all that the company can achieve positive future growth in the face of a shrinking broader industry.

What Does Ebiquity's P/S Mean For Investors?

The southerly movements of Ebiquity's shares means its P/S is now sitting at a pretty low level. 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 look into Ebiquity'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. We believe there could be some underlying risks that are keeping the P/S modest in the context of above-average revenue growth. One major risk is whether its revenue trajectory can keep outperforming under these tough industry conditions. So, the risk of a price drop looks to be subdued, but investors seem to think future revenue could see a lot of volatility.

Before you settle on your opinion, we've discovered 2 warning signs for Ebiquity 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).

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.