Some Confidence Is Lacking In REA Group Limited's (ASX:REA) P/S

REA Group Limited's (ASX:REA) price-to-sales (or "P/S") ratio of 19.5x may look like a poor investment opportunity when you consider close to half the companies in the Interactive Media and Services industry in Australia have P/S ratios below 2.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for REA Group

What Does REA Group's Recent Performance Look Like?

Recent revenue growth for REA Group has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. If not, then existing shareholders may 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 REA Group.

How Is REA Group's Revenue Growth Trending?

In order to justify its P/S ratio, REA Group would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. Pleasingly, revenue has also lifted 67% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 7.5% per year during the coming three years according to the analysts following the company. With the industry predicted to deliver 8.5% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that REA Group's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that REA Group currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

It is also worth noting that we have found 1 warning sign for REA Group that you need to take into consideration.

If these risks are making you reconsider your opinion on REA Group, 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.