Why Investors Shouldn't Be Surprised By NextEd Group Limited's (ASX:NXD) 42% Share Price Plunge

The NextEd Group Limited (ASX:NXD) share price has fared very poorly over the last month, falling by a substantial 42%. For any long-term shareholders, the last month ends a year to forget by locking in a 88% share price decline.

Since its price has dipped substantially, considering around half the companies operating in Australia's Consumer Services industry have price-to-sales ratios (or "P/S") above 0.7x, you may consider NextEd Group as an solid investment opportunity with its 0.2x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for NextEd Group

What Does NextEd Group's Recent Performance Look Like?

There hasn't been much to differentiate NextEd Group's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. Those who are bullish on NextEd Group will be hoping that this isn't the case.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

Retrospectively, the last year delivered a decent 8.9% gain to the company's revenues. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, even though the last 12 months were fairly tame in comparison. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 1.6% per annum during the coming three years according to the two analysts following the company. With the industry predicted to deliver 5.7% growth per annum, that's a disappointing outcome.

With this information, we are not surprised that NextEd Group is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does NextEd Group's P/S Mean For Investors?

NextEd Group's P/S has taken a dip along with its share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that NextEd Group's P/S is on the lower end of the spectrum. As other companies in the industry are forecasting revenue growth, NextEd Group's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It is also worth noting that we have found 3 warning signs for NextEd Group (1 shouldn't be ignored!) that you need to take into consideration.

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.