Pinning Down APA Group's (ASX:APA) P/S Is Difficult Right Now
APA Group's (ASX:APA) price-to-sales (P/S) ratio stands at 3.7x, significantly higher than the industry average of 0.8x. Despite a recent revenue growth of 4.6% and a total increase of 17% over three years, analysts predict a modest future growth of 4.5% per annum, aligning with industry expectations. This elevated P/S ratio raises concerns about the sustainability of its share price, as investors may be overly optimistic. Caution is advised, with three warning signs identified for the company.
APA Group's (ASX:APA) price-to-sales (or "P/S") ratio of 3.7x may look like a poor investment opportunity when you consider close to half the companies in the Gas Utilities industry in Australia have P/S ratios below 0.8x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.
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See our latest analysis for APA Group
How Has APA Group Performed Recently?
APA Group could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on APA Group.
Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, APA Group would need to produce outstanding growth that's well in excess of the industry.
If we review the last year of revenue growth, the company posted a worthy increase of 4.6%. The solid recent performance means it was also able to grow revenue by 17% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.
Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 4.5% per annum over the next three years. With the industry predicted to deliver 4.0% growth each year, the company is positioned for a comparable revenue result.
With this in consideration, we find it intriguing that APA Group's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.
What We Can Learn From APA Group'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 APA Group's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.
You should always think about risks. Case in point, we've spotted 3 warning signs for APA Group you should be aware of, and 2 of them don't sit too well with us.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
