What Wolverine World Wide, Inc.'s (NYSE:WWW) 54% Share Price Gain Is Not Telling You

Wolverine World Wide, Inc. (NYSE:WWW) shares have continued their recent momentum with a 54% gain in the last month alone. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 12% over that time.

Although its price has surged higher, there still wouldn't be many who think Wolverine World Wide's price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S in the United States' Luxury industry is similar at about 0.7x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Wolverine World Wide

How Wolverine World Wide Has Been Performing

Wolverine World Wide 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. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Want the full picture on analyst estimates for the company? Then our free report on Wolverine World Wide will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 24%. Regardless, revenue has managed to lift by a handy 9.4% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 14% as estimated by the eight analysts watching the company. Meanwhile, the broader industry is forecast to expand by 5.3%, which paints a poor picture.

With this in consideration, we think it doesn't make sense that Wolverine World Wide's P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On Wolverine World Wide's P/S

Wolverine World Wide appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

It appears that Wolverine World Wide currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You should always think about risks. Case in point, we've spotted 2 warning signs for Wolverine World Wide you should be aware of, and 1 of them can't be ignored.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.