Market Cool On Shearwater Group plc's (LON:SWG) Revenues

You may think that with a price-to-sales (or "P/S") ratio of 0.5x Shearwater Group plc (LON:SWG) is a stock worth checking out, seeing as almost half of all the Software companies in the United Kingdom have P/S ratios greater than 2.5x and even P/S higher than 5x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Shearwater Group

What Does Shearwater Group's Recent Performance Look Like?

Shearwater Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If you still like the company, you'd be hoping this isn't the case so that you could potentially 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 Shearwater Group will help you uncover what's on the horizon.

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

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 15%. The last three years don't look nice either as the company has shrunk revenue by 29% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 22% during the coming year according to the only analyst following the company. With the industry only predicted to deliver 13%, the company is positioned for a stronger revenue result.

With this information, we find it odd that Shearwater Group is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What Does Shearwater Group's P/S Mean For Investors?

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.

A look at Shearwater Group's revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Shearwater Group (of which 1 can't be ignored!) you should know about.

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

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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.

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