Funding Circle Holdings plc's (LON:FCH) 25% Price Boost Is Out Of Tune With Revenues

Despite an already strong run, Funding Circle Holdings plc (LON:FCH) shares have been powering on, with a gain of 25% in the last thirty days. The last 30 days bring the annual gain to a very sharp 26%.

Following the firm bounce in price, when almost half of the companies in the United Kingdom's Consumer Finance industry have price-to-sales ratios (or "P/S") below 1x, you may consider Funding Circle Holdings as a stock probably not worth researching with its 2.8x 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 Funding Circle Holdings

What Does Funding Circle Holdings' Recent Performance Look Like?

Funding Circle Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Funding Circle Holdings will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The High P/S?

Funding Circle Holdings' 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 grew revenue by an impressive 23% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 32% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 13% each year during the coming three years according to the three analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 19% per annum, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Funding Circle Holdings' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. 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.

The Bottom Line On Funding Circle Holdings' P/S

Funding Circle Holdings' P/S is on the rise since its shares have risen strongly. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

It comes as a surprise to see Funding Circle Holdings trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

It is also worth noting that we have found 1 warning sign for Funding Circle Holdings that you need to take into consideration.

If you're unsure about the strength of Funding Circle Holdings' 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.