Risks To Shareholder Returns Are Elevated At These Prices For ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB)

When close to half the companies in the Transportation industry in Germany have price-to-sales ratios (or "P/S") below 0.4x, you may consider ÜSTRA Hannoversche Verkehrsbetriebe Aktiengesellschaft (FRA:HVB) as a stock to potentially avoid with its 2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for ÜSTRA Hannoversche Verkehrsbetriebe

How Has ÜSTRA Hannoversche Verkehrsbetriebe Performed Recently?

As an illustration, revenue has deteriorated at ÜSTRA Hannoversche Verkehrsbetriebe over the last year, which is not ideal at all. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for ÜSTRA Hannoversche Verkehrsbetriebe, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is ÜSTRA Hannoversche Verkehrsbetriebe's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as ÜSTRA Hannoversche Verkehrsbetriebe's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 2.7% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 26% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that ÜSTRA Hannoversche Verkehrsbetriebe is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

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 established that ÜSTRA Hannoversche Verkehrsbetriebe currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

It is also worth noting that we have found 2 warning signs for ÜSTRA Hannoversche Verkehrsbetriebe (1 shouldn't be ignored!) 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.