Thoughtworks Holding, Inc. (NASDAQ:TWKS) Shares Fly 27% But Investors Aren't Buying For Growth

Those holding Thoughtworks Holding, Inc. (NASDAQ:TWKS) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 56% share price decline over the last year.

In spite of the firm bounce in price, Thoughtworks Holding's price-to-sales (or "P/S") ratio of 1.1x might still make it look like a buy right now compared to the IT industry in the United States, where around half of the companies have P/S ratios above 1.8x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Thoughtworks Holding

How Has Thoughtworks Holding Performed Recently?

Thoughtworks Holding could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Thoughtworks Holding.

Do Revenue Forecasts Match The Low P/S Ratio?

Thoughtworks Holding's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 6.8% decrease to the company's top line. Still, the latest three year period has seen an excellent 48% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue growth is heading into negative territory, declining 4.3% over the next year. Meanwhile, the broader industry is forecast to expand by 9.9%, which paints a poor picture.

In light of this, it's understandable that Thoughtworks Holding's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Thoughtworks Holding's P/S?

Despite Thoughtworks Holding's share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of Thoughtworks Holding's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Thoughtworks Holding's poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Thoughtworks Holding with six simple checks.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.