Subdued Growth No Barrier To Avon Technologies Plc's (LON:AVON) Price

When you see that almost half of the companies in the Aerospace & Defense industry in the United Kingdom have price-to-sales ratios (or "P/S") below 2x, Avon Technologies Plc (LON:AVON) looks to be giving off some sell signals with its 2.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Avon Technologies

How Avon Technologies Has Been Performing

There hasn't been much to differentiate Avon Technologies' and the industry's revenue growth lately. It might be that many expect the mediocre 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.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Avon Technologies.

Is There Enough Revenue Growth Forecasted For Avon Technologies?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 10% last year. Revenue has also lifted 20% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 6.9% during the coming year according to the five analysts following the company. That's shaping up to be similar to the 8.7% growth forecast for the broader industry.

With this information, we find it interesting that Avon Technologies is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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.

Analysts are forecasting Avon Technologies' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about this 1 warning sign we've spotted with Avon Technologies.

If you're unsure about the strength of Avon Technologies' 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.