AJ Lucas Group Limited's (ASX:AJL) Price Is Out Of Tune With Revenues

With a median price-to-sales (or "P/S") ratio of close to 0.5x in the Construction industry in Australia, you could be forgiven for feeling indifferent about AJ Lucas Group Limited's (ASX:AJL) P/S ratio of 0.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for AJ Lucas Group

What Does AJ Lucas Group's P/S Mean For Shareholders?

Revenue has risen firmly for AJ Lucas Group recently, which is pleasing to see. It might be that many expect the respectable revenue performance to wane, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on AJ Lucas Group will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For AJ Lucas Group?

There's an inherent assumption that a company should be matching the industry for P/S ratios like AJ Lucas Group's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. As a result, it also grew revenue by 7.4% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 9.2% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that AJ Lucas Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

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.

Our examination of AJ Lucas Group revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Having said that, be aware AJ Lucas Group is showing 4 warning signs in our investment analysis, and 3 of those make us uncomfortable.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.