THG Plc (LON:THG) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Those holding THG Plc (LON:THG) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 37% over that time.

In spite of the firm bounce in price, there still wouldn't be many who think THG's price-to-sales (or "P/S") ratio of 0.4x is worth a mention when the median P/S in the United Kingdom's Multiline Retail industry is similar at about 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for THG

How Has THG Performed Recently?

THG could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

What Are Revenue Growth Metrics Telling Us About The P/S?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 6.0%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.0% 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.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 0.4% over the next year. That's shaping up to be materially lower than the 11% growth forecast for the broader industry.

With this in mind, we find it intriguing that THG's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

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

THG appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that THG's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 3 warning signs for THG that we have uncovered.

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.