When close to half the companies operating in the Commercial Services industry in Australia have price-to-sales ratios (or "P/S") above 1.4x, you may consider Straker Limited (ASX:STG) as an attractive investment with its 0.6x P/S ratio. 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 Straker
Straker could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.
Keen to find out how analysts think Straker's future stacks up against the industry? In that case, our free report is a great place to start.In order to justify its P/S ratio, Straker would need to produce sluggish growth that's trailing 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 9.0%. Regardless, revenue has managed to lift by a handy 19% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.
Shifting to the future, estimates from the one analyst covering the company suggest revenue growth is heading into negative territory, declining 5.1% over the next year. Meanwhile, the broader industry is forecast to expand by 4.2%, which paints a poor picture.
In light of this, it's understandable that Straker'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. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Straker's P/S is on the lower end of the spectrum. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.
Before you take the next step, you should know about the 2 warning signs for Straker that we have uncovered.
If you're unsure about the strength of Straker's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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