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With a median price-to-sales (or "P/S") ratio of close to 3x in the Software industry in Canada, you could be forgiven for feeling indifferent about Lumine Group Inc.'s (CVE:LMN) P/S ratio of 2.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
See our latest analysis for Lumine Group
What Does Lumine Group's P/S Mean For Shareholders?
With revenue growth that's exceedingly strong of late, Lumine Group has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. Those who are bullish on Lumine Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
Although there are no analyst estimates available for Lumine Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Lumine Group's Revenue Growth Trending?
The only time you'd be comfortable seeing a P/S like Lumine Group's is when the company's growth is tracking the industry closely.
If we review the last year of revenue growth, the company posted a terrific increase of 72%. Pleasingly, revenue has also lifted 155% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.
Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 17% shows it's noticeably more attractive.
In light of this, it's curious that Lumine Group's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.
What We Can Learn From Lumine Group's P/S?
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
We didn't quite envision Lumine Group's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.
Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Lumine Group with six simple checks.