Lacklustre Performance Is Driving Watkin Jones Plc's (LON:WJG) 37% Price Drop

Watkin Jones Plc (LON:WJG) shareholders that were waiting for something to happen have been dealt a blow with a 37% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 26% in that time.

Since its price has dipped substantially, Watkin Jones may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.2x, since almost half of all companies in the Real Estate industry in the United Kingdom have P/S ratios greater than 4.2x and even P/S higher than 8x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Watkin Jones

How Watkin Jones Has Been Performing

There hasn't been much to differentiate Watkin Jones' and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Watkin Jones.

Do Revenue Forecasts Match The Low P/S Ratio?

Watkin Jones' P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 18%. Revenue has also lifted 25% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the four analysts covering the company are not good at all, suggesting revenue should decline by 9.3% over the next year. The industry is also set to see revenue decline 7.2% but the stock is shaping up to perform materially worse.

With this in consideration, it's clear to us why Watkin Jones' P/S isn't quite up to scratch with its industry peers. However, when revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Watkin Jones' P/S Mean For Investors?

Having almost fallen off a cliff, Watkin Jones' share price has pulled its P/S way down as well. 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.

As we suspected, our examination of Watkin Jones' analyst forecasts revealed that its even shakier outlook against the industry is contributing factor to why its P/S is so low. With such a gloomy outlook, investors feel the potential for an improvement in revenue isn't great enough to justify paying a premium resulting in a higher P/S ratio. Although, we would be concerned whether the company can even maintain this level of performance under these tough industry conditions. In the meantime, unless the company's prospects improve they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Watkin Jones has 1 warning sign we think you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.