Risks Still Elevated At These Prices As Freelancer Limited (ASX:FLN) Shares Dive 27%

Freelancer Limited (ASX:FLN) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 22%.

Although its price has dipped substantially, given close to half the companies operating in Australia's Professional Services industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider Freelancer as a stock to potentially avoid with its 1.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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Check out our latest analysis for Freelancer

What Does Freelancer's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Freelancer has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Freelancer's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Freelancer's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a decent 3.8% gain to the company's revenues. However, this wasn't enough as the latest three year period has seen an unpleasant 9.7% overall drop in revenue. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 5.6% over the next year. That's shaping up to be similar to the 3.8% growth forecast for the broader industry.

In light of this, it's curious that Freelancer's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

There's still some elevation in Freelancer's P/S, even if the same can't be said for its share price recently. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Freelancer currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Freelancer (at least 1 which is a bit unpleasant), and understanding these should be part of your investment process.

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.