Nature Wood Group Limited's (NASDAQ:NWGL) 34% Share Price Plunge Could Signal Some Risk

Nature Wood Group Limited (NASDAQ:NWGL) shareholders that were waiting for something to happen have been dealt a blow with a 34% share price drop in the last month. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

In spite of the heavy fall in price, given close to half the companies operating in the United States' Forestry industry have price-to-sales ratios (or "P/S") below 0.3x, you may still consider Nature Wood Group as a stock to potentially avoid with its 1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Nature Wood Group

What Does Nature Wood Group's Recent Performance Look Like?

For example, consider that Nature Wood Group's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Nature Wood Group's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Nature Wood Group?

In order to justify its P/S ratio, Nature Wood Group would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 54% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 32% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 1.4% shows it's an unpleasant look.

With this information, we find it concerning that Nature Wood Group is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 Does Nature Wood Group's P/S Mean For Investors?

Nature Wood Group's P/S remain high even after its stock plunged. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Nature Wood Group revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Nature Wood Group (1 makes us a bit uncomfortable!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.