Getting In Cheap On ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB) Is Unlikely

When close to half the companies in the Transportation industry in Germany have price-to-sales ratios (or "P/S") below 0.7x, you may consider ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB) as a stock to potentially avoid with its 1.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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Check out our latest analysis for ÜSTRA Hannoversche Verkehrsbetriebe

How ÜSTRA Hannoversche Verkehrsbetriebe Has Been Performing

For instance, ÜSTRA Hannoversche Verkehrsbetriebe's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on ÜSTRA Hannoversche Verkehrsbetriebe's earnings, revenue and cash flow.

How Is ÜSTRA Hannoversche Verkehrsbetriebe's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like ÜSTRA Hannoversche Verkehrsbetriebe's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 2.2% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 3.0% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that ÜSTRA Hannoversche Verkehrsbetriebe's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On ÜSTRA Hannoversche Verkehrsbetriebe's P/S

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.

The fact that ÜSTRA Hannoversche Verkehrsbetriebe currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 2 warning signs for ÜSTRA Hannoversche Verkehrsbetriebe that you need to take into consideration.

If these risks are making you reconsider your opinion on ÜSTRA Hannoversche Verkehrsbetriebe, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.