Step One Clothing Limited's (ASX:STP) Business Is Yet to Catch Up With Its Share Price

There wouldn't be many who think Step One Clothing Limited's (ASX:STP) price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S for the Specialty Retail industry in Australia is similar at about 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Step One Clothing

What Does Step One Clothing's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Step One Clothing has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

Is There Some Revenue Growth Forecasted For Step One Clothing?

In order to justify its P/S ratio, Step One Clothing would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.5%. The latest three year period has also seen an excellent 215% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 1.1% during the coming year according to the dual analysts following the company. With the industry predicted to deliver 5.9% growth, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Step One Clothing's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Step One Clothing's P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that Step One Clothing's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Step One Clothing (2 are a bit unpleasant!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.