ASF Group Limited's (ASX:AFA) Shares Leap 50% Yet They're Still Not Telling The Full Story

ASF Group Limited (ASX:AFA) shareholders would be excited to see that the share price has had a great month, posting a 50% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 80% share price drop in the last twelve months.

Although its price has surged higher, given about half the companies operating in Australia's Diversified Financial industry have price-to-sales ratios (or "P/S") above 2.1x, you may still consider ASF Group as an attractive investment with its 0.1x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for ASF Group

How Has ASF Group Performed Recently?

ASF Group 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. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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

Is There Any Revenue Growth Forecasted For ASF Group?

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

Taking a look back first, we see that the company's revenues underwent some rampant growth over the last 12 months. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing that to the industry, which is predicted to shrink 26% in the next 12 months, the company's positive momentum based on recent medium-term revenue results is a bright spot for the moment.

In light of this, it's quite peculiar that ASF Group's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On ASF Group's P/S

Despite ASF Group's share price climbing recently, its P/S still lags most other companies. 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.

Upon analysing the past data, we see it is unexpected that ASF Group is currently trading at a lower P/S than the rest of the industry given that its revenue growth in the past three-year years is exceeding expectations in a challenging industry. We think potential risks might be placing significant pressure on the P/S ratio and share price. Amidst challenging industry conditions, perhaps a key concern is whether the company can sustain its superior revenue growth trajectory. While the chance of the share price dropping sharply is fairly remote, investors do seem to be anticipating future revenue instability.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for ASF Group that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.