Insignia Financial Ltd. (ASX:IFL) Looks Inexpensive But Perhaps Not Attractive Enough

Insignia Financial Ltd.'s (ASX:IFL) price-to-sales (or "P/S") ratio of 0.9x might make it look like a strong buy right now compared to the Capital Markets industry in Australia, where around half of the companies have P/S ratios above 6x and even P/S above 20x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for Insignia Financial

What Does Insignia Financial's P/S Mean For Shareholders?

Insignia Financial could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Insignia Financial will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Insignia Financial's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.3%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 61% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 9.8% per annum during the coming three years according to the nine analysts following the company. With the industry predicted to deliver 4.0% growth per annum, that's a disappointing outcome.

In light of this, it's understandable that Insignia Financial's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

What Does Insignia Financial's P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's clear to see that Insignia Financial maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. As other companies in the industry are forecasting revenue growth, Insignia Financial's poor outlook justifies its low P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Insignia Financial 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.