Merchant House International Limited's (ASX:MHI) Share Price Is Matching Sentiment Around Its Revenues

Merchant House International Limited's (ASX:MHI) price-to-sales (or "P/S") ratio of 0.1x might make it look like a buy right now compared to the Luxury industry in Australia, where around half of the companies have P/S ratios above 0.8x and even P/S above 3x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Merchant House International

How Has Merchant House International Performed Recently?

Merchant House International certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Merchant House International will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Merchant House International's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

Taking a look back first, we see that the company grew revenue by an impressive 56% last year. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 7.9% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Merchant House International's P/S falls short of the mark set by its industry peers. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Merchant House International'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.

As we suspected, our examination of Merchant House International revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for Merchant House International that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.