Change Financial Limited (ASX:CCA) Looks Just Right With A 27% Price Jump

Those holding Change Financial Limited (ASX:CCA) shares would be relieved that the share price has rebounded 27% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Since its price has surged higher, when almost half of the companies in Australia's Diversified Financial industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Change Financial as a stock probably not worth researching with its 2.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Change Financial

How Change Financial Has Been Performing

Change Financial certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Change Financial.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Change Financial would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The latest three year period has also seen an excellent 69% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 38% each year during the coming three years according to the one analyst following the company. Meanwhile, the broader industry is forecast to contract by 4.6% per annum, which would indicate the company is doing very well.

With this in consideration, we understand why Change Financial's P/S is a cut above its industry peers. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader industry going backwards.

What We Can Learn From Change Financial's P/S?

Change Financial's P/S is on the rise since its shares have risen strongly. 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.

As we anticipated, our review of Change Financial's analyst forecasts shows that the company's better revenue forecast compared to a turbulent industry is a significant contributor to its high price-to-sales ratio. At this stage investors feel the potential for a deterioration in revenue is remote enough to justify paying a premium in the form of a high P/S. Questions could still raised over whether this level of outperformance can continue in the context of a a tumultuous industry climate. Assuming the company's outlook remains unchanged, the share price is likely to be supported by prospective buyers.

You always need to take note of risks, for example - Change Financial has 1 warning sign we think you should be aware of.

If these risks are making you reconsider your opinion on Change Financial, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.