Why Investors Shouldn't Be Surprised By Smartfit Escola de Ginástica e Dança S.A.'s (BVMF:SMFT3) P/S

Smartfit Escola de Ginástica e Dança S.A.'s (BVMF:SMFT3) price-to-sales (or "P/S") ratio of 2.7x may look like a poor investment opportunity when you consider close to half the companies in the Hospitality industry in Brazil have P/S ratios below 0.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Smartfit Escola de Ginástica e Dança

What Does Smartfit Escola de Ginástica e Dança's P/S Mean For Shareholders?

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 that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Smartfit Escola de Ginástica e Dança.

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

The only time you'd be truly comfortable seeing a P/S as steep as Smartfit Escola de Ginástica e Dança's is when the company's growth is on track to outshine the industry decidedly.

If we review the last year of revenue growth, the company posted a terrific increase of 37%. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 22% each year during the coming three years according to the eleven analysts following the company. With the industry only predicted to deliver 12% each year, the company is positioned for a stronger revenue result.

With this information, we can see why Smartfit Escola de Ginástica e Dança is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Smartfit Escola de Ginástica e Dança'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.

As we suspected, our examination of Smartfit Escola de Ginástica e Dança's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 2 warning signs for Smartfit Escola de Ginástica e Dança (1 is significant!) that 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com