Yahoo Finance What 3P Learning Limited's (ASX:3PL) P/S Is Not Telling You
When you see that almost half of the companies in the Consumer Services industry in Australia have price-to-sales ratios (or "P/S") below 0.8x, 3P Learning Limited (ASX:3PL) looks to be giving off strong sell signals with its 3.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
View our latest analysis for 3P Learning
How Has 3P Learning Performed Recently?
3P Learning could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think 3P Learning's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Enough Revenue Growth Forecasted For 3P Learning?
In order to justify its P/S ratio, 3P Learning would need to produce outstanding growth that's well in excess of the industry.
Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. This was backed up an excellent period prior to see revenue up by 95% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 8.6% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 13% per year, which is noticeably more attractive.
With this information, we find it concerning that 3P Learning is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.
The Key Takeaway
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.
Despite analysts forecasting some poorer-than-industry revenue growth figures for 3P Learning, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.
Before you take the next step, you should know about the 1 warning sign for 3P Learning that we have uncovered.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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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.
