Merit Group plc's (LON:MRIT) 34% Jump Shows Its Popularity With Investors

Merit Group plc (LON:MRIT) shareholders are no doubt pleased to see that the share price has bounced 34% in the last month, although it is still struggling to make up recently lost ground. But the last month did very little to improve the 57% share price decline over the last year.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Merit Group's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Media industry in the United Kingdom is also close to 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Merit Group

How Merit Group Has Been Performing

Merit Group 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. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Do Revenue Forecasts Match The P/S Ratio?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. This isn't what shareholders were looking for as it means they've been left with a 17% decline in revenue over the last three years in total. 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 are not great, suggesting revenue should decline by 1.2% over the next year. With the rest of the industry predicted to shrink by 1.1%, it's set to post a similar result.

With this information, it's not too hard to see why Merit Group is trading at a fairly similar P/S in comparison. Nonetheless, with revenue going in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

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

Merit Group appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

As expected, we see that Merit Group maintains its moderate P/S thanks to a revenue outlook that's pretty much level with the wider industry. Right now, shareholders are comfortable with the P/S as they have faith that future revenue will not uncover any unpleasant surprises. Although, we are somewhat concerned whether the company can maintain this level of performance under these tough industry conditions. For now though, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

You need to take note of risks, for example - Merit Group has 4 warning signs (and 3 which shouldn't be ignored) we think you should know about.

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).

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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.