Equnico SE's (WSE:EQU) 25% Price Boost Is Out Of Tune With Revenues

Equnico SE (WSE:EQU) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 57%.

After such a large jump in price, you could be forgiven for thinking Equnico is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 2.7x, considering almost half the companies in Poland's Construction industry have P/S ratios below 0.5x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Equnico

What Does Equnico's P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Equnico, which is generally not a bad outcome. It might be that many expect the reasonable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Equnico, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Equnico's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Equnico's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a decent 5.3% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 50% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 10% shows it's an unpleasant look.

With this in mind, we find it worrying that Equnico's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

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

The strong share price surge has lead to Equnico's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Equnico currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 3 warning signs for Equnico (1 makes us a bit uncomfortable!) that you should be aware of.

If these risks are making you reconsider your opinion on Equnico, 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.