Yahoo Finance HeiQ Plc (LON:HEIQ) Might Not Be As Mispriced As It Looks After Plunging 26%
HeiQ Plc (LON:HEIQ) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 79% loss during that time.
Since its price has dipped substantially, HeiQ's price-to-sales (or "P/S") ratio of 0.7x might make it look like a buy right now compared to the Chemicals industry in the United Kingdom, where around half of the companies have P/S ratios above 1.3x and even P/S above 4x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
Check out our latest analysis for HeiQ
How Has HeiQ Performed Recently?
Recent times haven't been great for HeiQ as its revenue has been falling quicker than most other companies. It seems that many are expecting the dismal revenue performance to persist, which has repressed the P/S. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. If not, then existing shareholders will probably struggle to get excited about the future direction of the share price.
Keen to find out how analysts think HeiQ's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
The only time you'd be truly comfortable seeing a P/S as low as HeiQ's is when the company's growth is on track to lag the industry.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 30%. As a result, revenue from three years ago have also fallen 10% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Looking ahead now, revenue is anticipated to remain buoyant, climbing by 5.9% during the coming year according to the one analyst following the company. Meanwhile, the broader industry is forecast to contract by 19%, which would indicate the company is doing very well.
With this in mind, we find it intriguing that HeiQ's P/S falls short of its industry peers. Apparently some shareholders are doubtful of the contrarian forecasts and have been accepting significantly lower selling prices.
The Bottom Line On HeiQ's P/S
HeiQ's P/S has taken a dip along with its share price. 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 HeiQ currently trades on a much lower than expected P/S since its growth forecasts are potentially beating a struggling industry. When we see a superior revenue outlook with some actual growth, we can only assume investor uncertainty is what's been suppressing the P/S figures. One major risk is whether its revenue trajectory can keep outperforming under these tough industry conditions. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.
You need to take note of risks, for example - HeiQ has 5 warning signs (and 1 which shouldn't be ignored) we think you should know about.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
