It's Down 28% But EDU Holdings Limited (ASX:EDU) Could Be Riskier Than It Looks

EDU Holdings Limited (ASX:EDU) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. Nonetheless, the last 30 days have barely left a scratch on the stock's annual performance, which is up a whopping 678%.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about EDU Holdings' P/S ratio of 1.3x, since the median price-to-sales (or "P/S") ratio for the Consumer Services industry in Australia is also close to 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Check out our latest analysis for EDU Holdings

How Has EDU Holdings Performed Recently?

Recent times have been quite advantageous for EDU Holdings as its revenue has been rising very briskly. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for EDU Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For EDU Holdings?

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

Taking a look back first, we see that the company grew revenue by an impressive 121% last year. Pleasingly, revenue has also lifted 219% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 6.1% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's curious that EDU Holdings' P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Final Word

With its share price dropping off a cliff, the P/S for EDU Holdings looks to be in line with the rest of the Consumer Services industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We didn't quite envision EDU Holdings' P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for EDU Holdings that you should be aware of.

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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.