Market Cool On Downer EDI Limited's (ASX:DOW) Revenues

When close to half the companies operating in the Commercial Services industry in Australia have price-to-sales ratios (or "P/S") above 1.2x, you may consider Downer EDI Limited (ASX:DOW) as an attractive investment with its 0.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Downer EDI

What Does Downer EDI's Recent Performance Look Like?

Downer EDI could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Downer EDI will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Downer EDI?

The only time you'd be truly comfortable seeing a P/S as low as Downer EDI's is when the company's growth is on track to lag the industry.

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 5.7%. The last three years don't look nice either as the company has shrunk revenue by 4.8% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 4.2% per annum during the coming three years according to the seven analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 5.0% per annum, which is not materially different.

With this in consideration, we find it intriguing that Downer EDI's P/S is lagging behind its industry peers. It may be that most investors are not convinced the company can achieve future growth expectations.

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.

It looks to us like the P/S figures for Downer EDI remain low despite growth that is expected to be in line with other companies in the industry. Despite average revenue growth estimates, there could be some unobserved threats keeping the P/S low. Perhaps investors are concerned that the company could underperform against the forecasts over the near term.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Downer EDI that you need to be mindful of.

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).

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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.