HomeToGo SE's (ETR:HTG) Share Price Not Quite Adding Up

HomeToGo SE's (ETR:HTG) price-to-sales (or "P/S") ratio of 1.4x may not look like an appealing investment opportunity when you consider close to half the companies in the Hospitality industry in Germany have P/S ratios below 0.8x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for HomeToGo

What Does HomeToGo's P/S Mean For Shareholders?

HomeToGo could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. 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 HomeToGo.

Do Revenue Forecasts Match The High P/S Ratio?

HomeToGo's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Pleasingly, revenue has also lifted 146% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 22% each year as estimated by the six analysts watching the company. With the industry predicted to deliver 327% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it concerning that HomeToGo is trading at a P/S higher than the industry. 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 Does HomeToGo's P/S Mean For Investors?

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.

We've concluded that HomeToGo currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

And what about other risks? Every company has them, and we've spotted 1 warning sign for HomeToGo you should know about.

If you're unsure about the strength of HomeToGo'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.