With a median price-to-sales (or "P/S") ratio of close to 0.4x in the Consumer Durables industry in Germany, you could be forgiven for feeling indifferent about Traumhaus AG's (ETR:TRU) P/S ratio, which comes in at about the same. 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.
View our latest analysis for Traumhaus
What Does Traumhaus' P/S Mean For Shareholders?
With revenue that's retreating more than the industry's average of late, Traumhaus has been very sluggish. One possibility is that the P/S is moderate because investors think the company's revenue trend will eventually fall in line with most others in the industry. If you still like the company, you'd want its revenue trajectory to turn around before making any decisions. If not, then existing shareholders may be a little nervous about the viability of the share price.
Want the full picture on analyst estimates for the company? Then our free report on Traumhaus will help you uncover what's on the horizon.
Is There Some Revenue Growth Forecasted For Traumhaus?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Traumhaus' to be considered reasonable.
Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 29%. As a result, revenue from three years ago have also fallen 16% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.
Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 20% per year over the next three years. That's shaping up to be materially higher than the 9.3% per annum growth forecast for the broader industry.
With this information, we find it interesting that Traumhaus is trading at a fairly similar P/S compared to the industry. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.
The Key Takeaway
Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.
Looking at Traumhaus' analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.