It's A Story Of Risk Vs Reward With AVA Risk Group Limited (ASX:AVA)

With a median price-to-sales (or "P/S") ratio of close to 1.5x in the Electronic industry in Australia, you could be forgiven for feeling indifferent about AVA Risk Group Limited's (ASX:AVA) P/S ratio of 1.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for AVA Risk Group

How AVA Risk Group Has Been Performing

With revenue growth that's inferior to most other companies of late, AVA Risk Group has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think AVA Risk Group's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For AVA Risk Group?

There's an inherent assumption that a company should be matching the industry for P/S ratios like AVA Risk Group's to be considered reasonable.

Retrospectively, the last year delivered a decent 5.4% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 22% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 31% each year as estimated by the only analyst watching the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader industry.

With this in consideration, we find it intriguing that AVA Risk Group's P/S is closely matching its industry peers. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What Does AVA Risk Group's P/S Mean For Investors?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that AVA Risk Group currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for AVA Risk Group that you should be aware of.

If you're unsure about the strength of AVA Risk Group'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.