Some Confidence Is Lacking In Carbon Revolution Public Limited Company (NASDAQ:CREV) As Shares Slide 55%

To the annoyance of some shareholders, Carbon Revolution Public Limited Company (NASDAQ:CREV) shares are down a considerable 55% 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 69% share price decline.

Even after such a large drop in price, when almost half of the companies in the United States' Auto Components industry have price-to-sales ratios (or "P/S") below 0.7x, you may still consider Carbon Revolution as a stock probably not worth researching with its 2.3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Carbon Revolution

What Does Carbon Revolution's P/S Mean For Shareholders?

For example, consider that Carbon Revolution's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Carbon Revolution's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 5.1% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 1.8% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Carbon Revolution'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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Carbon Revolution's P/S?

Carbon Revolution's P/S remain high even after its stock plunged. 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.

We've established that Carbon Revolution currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

You need to take note of risks, for example - Carbon Revolution has 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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