Take Care Before Diving Into The Deep End On SelfWealth Limited (ASX:SWF)

With a price-to-sales (or "P/S") ratio of 1x SelfWealth Limited (ASX:SWF) may be sending very bullish signals at the moment, given that almost half of all the Capital Markets companies in Australia have P/S ratios greater than 5.7x and even P/S higher than 20x are not unusual. 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.

Check out our latest analysis for SelfWealth

What Does SelfWealth's P/S Mean For Shareholders?

The revenue growth achieved at SelfWealth over the last year would be more than acceptable for most companies. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. 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 earnings, revenue and cash flow for the company? Then our free report on SelfWealth will help you shine a light on its historical performance.

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

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

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 103% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to shrink 2.2% 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 SelfWealth's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader industry.

The Bottom Line On SelfWealth's P/S

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Looking at the figures, it's surprising to see SelfWealth currently trades on a much lower than expected P/S since its recent three-year revenue growth is beating forecasts for a struggling industry. We think potential risks might be placing significant pressure on the P/S ratio and share price. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. At least the risk of a price drop looks to be subdued, but investors think future revenue could see a lot of volatility.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for SelfWealth (1 is concerning) 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.