K3 Business Technology Group plc's (LON:KBT) Price Is Right But Growth Is Lacking
K3 Business Technology Group plc's (LON:KBT) price-to-sales (or "P/S") ratio of 1.1x might make it look like a buy right now compared to the Software industry in the United Kingdom, where around half of the companies have P/S ratios above 2.6x and even P/S above 5x are quite common. 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 K3 Business Technology Group
What Does K3 Business Technology Group's Recent Performance Look Like?
Revenue has risen at a steady rate over the last year for K3 Business Technology Group, which is generally not a bad outcome. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. Those who are bullish on K3 Business Technology Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
Want the full picture on earnings, revenue and cash flow for the company? Then our free report on K3 Business Technology Group will help you shine a light on its historical performance.
Do Revenue Forecasts Match The Low P/S Ratio?
In order to justify its P/S ratio, K3 Business Technology Group would need to produce sluggish growth that's trailing the industry.
Retrospectively, the last year delivered a decent 5.0% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 5.1% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.
With this information, we are not surprised that K3 Business Technology Group is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.
What We Can Learn From K3 Business Technology Group's P/S?
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.
It's no surprise that K3 Business Technology Group maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
And what about other risks? Every company has them, and we've spotted 2 warning signs for K3 Business Technology Group (of which 1 is a bit concerning!) 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here
