Optimistic Investors Push Megaron S.A. (WSE:MEG) Shares Up 71% But Growth Is Lacking

Megaron S.A. (WSE:MEG) shareholders would be excited to see that the share price has had a great month, posting a 71% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 20% over that time.

Even after such a large jump in price, there still wouldn't be many who think Megaron's price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S in Poland's Basic Materials industry is similar at about 0.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Megaron

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

For example, consider that Megaron's financial performance has been pretty ordinary lately as revenue growth is non-existent. It might be that many expect the uninspiring revenue performance to only match most other companies at best over the coming period, which has kept the P/S from rising. Those who are bullish on Megaron will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

How Is Megaron's Revenue Growth Trending?

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

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 2.9% drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 6.3% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

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

The Key Takeaway

Megaron's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of 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.

The fact that Megaron currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Megaron, and understanding them should be part of your investment process.

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