It's Down 29% But EDU Holdings Limited (ASX:EDU) Could Be Riskier Than It Looks

Unfortunately for some shareholders, the EDU Holdings Limited (ASX:EDU) share price has dived 29% in the last thirty days, prolonging recent pain. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 63% loss during that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about EDU Holdings' P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Consumer Services industry in Australia is also close to 0.8x. 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.

View our latest analysis for EDU Holdings

What Does EDU Holdings' Recent Performance Look Like?

Recent times have been quite advantageous for EDU Holdings as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on EDU Holdings will help you shine a light on its historical performance.

How Is EDU Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, EDU Holdings would need to produce growth that's similar to the industry.

Taking a look back first, we see that the company grew revenue by an impressive 48% last year. The latest three year period has also seen a 20% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 0.3% 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 Bottom Line On EDU Holdings' P/S

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. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with EDU Holdings, and understanding them should be part of your investment process.

If you're unsure about the strength of EDU Holdings' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.