Vitru Brasil Empreendimentos, Participações e Comércio S.A.'s (BVMF:VTRU3) 26% Share Price Surge Not Quite Adding Up

Despite an already strong run, Vitru Brasil Empreendimentos, Participações e Comércio S.A. (BVMF:VTRU3) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, there still wouldn't be many who think Vitru Brasil Empreendimentos Participações e Comércio's price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in Brazil's Consumer Services industry is similar at about 0.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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Check out our latest analysis for Vitru Brasil Empreendimentos Participações e Comércio

What Does Vitru Brasil Empreendimentos Participações e Comércio's P/S Mean For Shareholders?

Recent times haven't been great for Vitru Brasil Empreendimentos Participações e Comércio as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. 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 Vitru Brasil Empreendimentos Participações e Comércio's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Vitru Brasil Empreendimentos Participações e Comércio's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.2% last year. The latest three year period has also seen an excellent 112% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 3.3% per year as estimated by the seven analysts watching the company. That's shaping up to be materially lower than the 10% each year growth forecast for the broader industry.

With this in mind, we find it intriguing that Vitru Brasil Empreendimentos Participações e Comércio's P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Vitru Brasil Empreendimentos Participações e Comércio's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look at the analysts forecasts of Vitru Brasil Empreendimentos Participações e Comércio's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. 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.

Before you settle on your opinion, we've discovered 3 warning signs for Vitru Brasil Empreendimentos Participações e Comércio (2 are concerning!) that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.