Insufficient Growth At Perpetual Limited (ASX:PPT) Hampers Share Price

You may think that with a price-to-sales (or "P/S") ratio of 1.7x Perpetual Limited (ASX:PPT) is definitely a stock worth checking out, seeing as almost half of all the Capital Markets companies in Australia have P/S ratios greater than 5.9x and even P/S above 17x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Perpetual

How Has Perpetual Performed Recently?

With revenue growth that's superior to most other companies of late, Perpetual has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Is There Any Revenue Growth Forecasted For Perpetual?

In order to justify its P/S ratio, Perpetual would need to produce anemic growth that's substantially trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 31%. The latest three year period has also seen an excellent 108% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 2.7% per annum over the next three years. That's shaping up to be materially lower than the 9.2% per year growth forecast for the broader industry.

With this information, we can see why Perpetual is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Perpetual's P/S

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.

As expected, our analysis of Perpetual's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Perpetual that you need to be mindful of.

If you're unsure about the strength of Perpetual's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.