Why Investors Shouldn't Be Surprised By Cavendish Financial plc's (LON:CAV) Low P/S

You may think that with a price-to-sales (or "P/S") ratio of 0.8x Cavendish Financial plc (LON:CAV) is definitely a stock worth checking out, seeing as almost half of all the Capital Markets companies in the United Kingdom have P/S ratios greater than 3.3x and even P/S above 9x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Cavendish Financial

What Does Cavendish Financial's P/S Mean For Shareholders?

Cavendish Financial certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Cavendish Financial will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cavendish Financial will help you shine a light on its historical performance.

How Is Cavendish Financial's Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Cavendish Financial's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 47% last year. However, the latest three year period hasn't been as great in aggregate as it didn't manage to provide any growth at all. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 5.1% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Cavendish Financial is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Cavendish Financial's P/S?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Cavendish Financial revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Cavendish Financial (1 doesn't sit too well with us!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.