8I Holdings Limited (ASX:8IH) Doing What It Can To Lift Shares

When you see that almost half of the companies in the Diversified Financial industry in Australia have price-to-sales ratios (or "P/S") above 1.8x, 8I Holdings Limited (ASX:8IH) looks to be giving off some buy signals with its 0.3x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for 8I Holdings

How 8I Holdings Has Been Performing

8I Holdings certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

Although there are no analyst estimates available for 8I Holdings, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, 8I Holdings would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 75% last year. Still, revenue has fallen 31% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for a contraction of 32% shows the industry is even less attractive on an annualised basis.

In light of this, the fact 8I Holdings' P/S sits below the majority of other companies is peculiar but certainly not shocking. There's no guarantee the P/S has found a floor yet with recent revenue going backwards, despite the industry heading down even harder. Even just maintaining these prices will be difficult to achieve as recent revenue trends are already weighing down the shares excessively.

The Key Takeaway

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.

A look into numbers has shown it's somewhat unexpected that 8I Holdings has a lower P/S than the industry average, given its recent three-year revenue performance which was better than anticipated for an industry facing challenges. There could be some major unobserved threats to revenue preventing the P/S ratio from matching this comparatively more attractive revenue performance. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. While recent medium-term revenue trends suggest that the risk of a price decline is low, investors appear to perceive a possibility of revenue volatility in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with 8I Holdings, and understanding should be part of your investment process.

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.