Revenues Not Telling The Story For Performant Financial Corporation (NASDAQ:PFMT)
Performant Financial Corporation's (NASDAQ:PFMT) price-to-sales (or "P/S") ratio of 2.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Commercial Services industry in the United States have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
See our latest analysis for Performant Financial
How Has Performant Financial Performed Recently?
Performant Financial could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. However, if this isn't the case, investors might get caught out paying to much for the stock.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Performant Financial.
Is There Enough Revenue Growth Forecasted For Performant Financial?
The only time you'd be truly comfortable seeing a P/S as high as Performant Financial's is when the company's growth is on track to outshine the industry.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 12%. This means it has also seen a slide in revenue over the longer-term as revenue is down 27% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 12% each year during the coming three years according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 92% per annum, which is noticeably more attractive.
With this in consideration, we believe it doesn't make sense that Performant Financial's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
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.
It comes as a surprise to see Performant Financial trade at such a high P/S given the revenue forecasts look less than stellar. 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. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Performant Financial that you should be aware of.
If you're unsure about the strength of Performant Financial's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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.
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