Downer EDI Limited's (ASX:DOW) price-to-sales (or "P/S") ratio of 0.3x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Commercial Services industry in Australia have P/S ratios greater than 1.5x. 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 Downer EDI

How Downer EDI Has Been Performing

While the industry has experienced revenue growth lately, Downer EDI's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. 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 Downer EDI.

Is There Any Revenue Growth Forecasted For Downer EDI?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Downer EDI's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 7.4% decrease to the company's top line. As a result, revenue from three years ago have also fallen 4.7% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 5.9% per year during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 4.5% growth per year, the company is positioned for a comparable revenue result.

With this information, we find it odd that Downer EDI is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What Does Downer EDI's P/S Mean For Investors?

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.

We've seen that Downer EDI currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

Plus, you should also learn about these 2 warning signs we've spotted with Downer EDI.

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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