Xref Limited's (ASX:XF1) Subdued P/S Might Signal An Opportunity
Xref Limited's (ASX:XF1) price-to-sales (or "P/S") ratio of 1.7x might make it look like a buy right now compared to the Software industry in Australia, where around half of the companies have P/S ratios above 2.8x and even P/S above 7x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.
View our latest analysis for Xref
How Xref Has Been Performing
The recent revenue growth at Xref would have to be considered satisfactory if not spectacular. Perhaps the market believes the recent revenue performance might fall short of industry figures in the near future, leading to a reduced P/S. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Although there are no analyst estimates available for Xref, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
Do Revenue Forecasts Match The Low P/S Ratio?
The only time you'd be truly comfortable seeing a P/S as low as Xref's is when the company's growth is on track to lag the industry.
If we review the last year of revenue growth, the company posted a worthy increase of 6.3%. This was backed up an excellent period prior to see revenue up by 124% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
When compared to the industry's one-year growth forecast of 24%, the most recent medium-term revenue trajectory is noticeably more alluring
In light of this, it's peculiar that Xref's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.
What We Can Learn From Xref's P/S?
It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
Our examination of Xref revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.
You should always think about risks. Case in point, we've spotted 1 warning sign for Xref you should be aware of.
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.
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