W5 Solutions AB (publ) (STO:W5) Soars 30% But It's A Story Of Risk Vs Reward

The W5 Solutions AB (publ) (STO:W5) share price has done very well over the last month, posting an excellent gain of 30%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 4.6% over the last year.

Although its price has surged higher, W5 Solutions may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.6x, considering almost half of all companies in the Aerospace & Defense industry in Sweden have P/S ratios greater than 3.8x and even P/S higher than 9x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Our free stock report includes 2 warning signs investors should be aware of before investing in W5 Solutions. Read for free now.

Check out our latest analysis for W5 Solutions

How W5 Solutions Has Been Performing

W5 Solutions hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited 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.

Is There Any Revenue Growth Forecasted For W5 Solutions?

There's an inherent assumption that a company should underperform the industry for P/S ratios like W5 Solutions' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.2% decrease to the company's top line. Still, the latest three year period has seen an excellent 192% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 20% per year during the coming three years according to the four analysts following the company. With the industry predicted to deliver 18% growth each year, the company is positioned for a comparable revenue result.

With this information, we find it odd that W5 Solutions is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can achieve future growth expectations.

What Does W5 Solutions' P/S Mean For Investors?

The latest share price surge wasn't enough to lift W5 Solutions' P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of W5 Solutions' revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with W5 Solutions (at least 1 which is potentially serious), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.