Getting In Cheap On Hornby PLC (LON:HRN) Might Be Difficult
There wouldn't be many who think Hornby PLC's (LON:HRN) price-to-sales (or "P/S") ratio of 0.5x is worth a mention when the median P/S for the Leisure industry in the United Kingdom is very similar. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Check out our latest analysis for Hornby
What Does Hornby's P/S Mean For Shareholders?
Hornby has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Hornby's earnings, revenue and cash flow.
Do Revenue Forecasts Match The P/S Ratio?
In order to justify its P/S ratio, Hornby would need to produce growth that's similar to the industry.
If we review the last year of revenue growth, the company posted a worthy increase of 4.0%. Pleasingly, revenue has also lifted 31% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.
It's interesting to note that the rest of the industry is similarly expected to grow by 10% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.
In light of this, it's understandable that Hornby's P/S sits in line with the majority of other companies. It seems most investors are expecting to see average growth rates continue into the future and are only willing to pay a moderate amount for the stock.
The Final Word
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.
As we've seen, Hornby's three-year revenue trends seem to be contributing to its P/S, given they look similar to current industry expectations. With previous revenue trends that keep up with the current industry outlook, it's hard to justify the company's P/S ratio deviating much from it's current point. Given the current circumstances, it seems improbable that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Hornby (of which 1 is a bit concerning!) you should know about.
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.
