There wouldn't be many who think RXO, Inc.'s (NYSE:RXO) price-to-sales (or "P/S") ratio of 0.6x is worth a mention when the median P/S for the Transportation industry in the United States is similar at about 0.8x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.
What Does RXO's Recent Performance Look Like?
While the industry has experienced revenue growth lately, RXO's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.
Want the full picture on analyst estimates for the company? Then our free report on RXO will help you uncover what's on the horizon.
Do Revenue Forecasts Match The P/S Ratio?
There's an inherent assumption that a company should be matching the industry for P/S ratios like RXO's to be considered reasonable.
In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 21% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.
Looking ahead now, revenue is anticipated to climb by 1.0% during the coming year according to the analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 8.2%, which is noticeably more attractive.
With this information, we find it interesting that RXO is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
What We Can Learn From RXO's P/S?
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.
Given that RXO's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.
Having said that, be aware RXO is showing 1 warning sign in our investment analysis, 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.
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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.