Investors Holding Back On Downer EDI Limited (ASX:DOW)

Downer EDI Limited's (ASX:DOW) price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Commercial Services industry in Australia, where around half of the companies have P/S ratios above 1.8x and even P/S above 5x 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.

See our latest analysis for Downer EDI

How Downer EDI Has Been Performing

Downer EDI could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Downer EDI's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Downer EDI's to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Whilst it's an improvement, it wasn't enough to get the company out of the hole it was in, with revenue down 4.1% overall from three years ago. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 5.1% per year during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 6.0% growth per year, the company is positioned for a comparable revenue result.

In light of this, it's peculiar that Downer EDI's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

What We Can Learn From Downer EDI'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.

Our examination of Downer EDI's revealed that its P/S remains low despite analyst forecasts of revenue growth matching the wider industry. When we see middle-of-the-road revenue growth like this, we assume it must be the potential risks that are what is placing pressure on the P/S ratio. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

You should always think about risks. Case in point, we've spotted 1 warning sign for Downer EDI you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.