Stock Analysis

Pinning Down Smartfit Escola de Ginástica e Dança S.A.'s (BVMF:SMFT3) P/S Is Difficult Right Now

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When you see that almost half of the companies in the Hospitality industry in Brazil have price-to-sales ratios (or "P/S") below 0.4x, Smartfit Escola de Ginástica e Dança S.A. (BVMF:SMFT3) looks to be giving off strong sell signals with its 3.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Smartfit Escola de Ginástica e Dança

BOVESPA:SMFT3 Price to Sales Ratio vs Industry January 3rd 2024

How Smartfit Escola de Ginástica e Dança Has Been Performing

Recent times have been advantageous for Smartfit Escola de Ginástica e Dança as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Smartfit Escola de Ginástica e Dança's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Smartfit Escola de Ginástica e Dança?

In order to justify its P/S ratio, Smartfit Escola de Ginástica e Dança would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 51% last year. The latest three year period has also seen an excellent 174% 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 23% each year over the next three years. That's shaping up to be materially lower than the 35% per year growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Smartfit Escola de Ginástica e Dança's P/S is outpacing its industry peers. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Smartfit Escola de Ginástica e Dança's P/S?

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Smartfit Escola de Ginástica e Dança, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 1 warning sign for Smartfit Escola de Ginástica e Dança you should be aware of.

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

Valuation is complex, but we're helping make it simple.

Find out whether Smartfit Escola de Ginástica e Dança is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.