W5 Solutions AB (publ) (STO:W5) Looks Inexpensive After Falling 26% But Perhaps Not Attractive Enough

To the annoyance of some shareholders, W5 Solutions AB (publ) (STO:W5) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 55% share price decline.

After such a large drop in price, W5 Solutions' price-to-sales (or "P/S") ratio of 1.3x might make it look like a buy right now compared to the Aerospace & Defense industry in Sweden, where around half of the companies have P/S ratios above 2.6x and even P/S above 6x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for W5 Solutions

How W5 Solutions Has Been Performing

Recent revenue growth for W5 Solutions has been in line with the industry. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on W5 Solutions 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 W5 Solutions' is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. The latest three year period has also seen an excellent 200% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 13% as estimated by the four analysts watching the company. That's shaping up to be materially lower than the 19% growth forecast for the broader industry.

With this in consideration, its clear as to why W5 Solutions' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From W5 Solutions' P/S?

W5 Solutions' recently weak share price has pulled its P/S back below other Aerospace & Defense companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that W5 Solutions maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 1 warning sign for W5 Solutions that we have uncovered.

If these risks are making you reconsider your opinion on W5 Solutions, 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.