What S4 Capital plc's (LON:SFOR) 34% Share Price Gain Is Not Telling You
Those holding S4 Capital plc (LON:SFOR) shares would be relieved that the share price has rebounded 34% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 34% in the last twelve months.
Even after such a large jump in price, you could still be forgiven for feeling indifferent about S4 Capital's P/S ratio of 0.2x, since the median price-to-sales (or "P/S") ratio for the Media industry in the United Kingdom is also close to 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
View our latest analysis for S4 Capital
What Does S4 Capital's P/S Mean For Shareholders?
S4 Capital could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
Want the full picture on analyst estimates for the company? Then our free report on S4 Capital will help you uncover what's on the horizon.Is There Some Revenue Growth Forecasted For S4 Capital?
There's an inherent assumption that a company should be matching the industry for P/S ratios like S4 Capital's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 14% 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 7.9% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
Turning to the outlook, the next year should bring plunging returns, with revenue decreasing 12% as estimated by the five analysts watching the company. The industry is also set to see revenue decline 2.3% but the stock is shaping up to perform materially worse.
In light of this, it's somewhat peculiar that S4 Capital's P/S sits in line with the majority of other companies. When revenue shrink rapidly the P/S often shrinks too, which could set up shareholders for future disappointment. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.
What Does S4 Capital's P/S Mean For Investors?
S4 Capital's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.
S4 Capital currently trades on a higher P/S than expected based on revenue decline, even more so since its revenue forecast is even worse than the struggling industry. Even though the company's P/S is on par with the rest of the industry, the fact that it's revenue outlook is poorer than an already struggling industry suggests that the P/S isn't justified. We're also cautious about the company's ability to resist even greater pain to its business from the broader industry turmoil. This presents a risk to investors if the P/S were to decline to a level that more accurately reflects the company's revenue prospects.
It is also worth noting that we have found 3 warning signs for S4 Capital that you need to take into consideration.
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.