Potential Upside For Funding Circle Holdings plc (LON:FCH) Not Without Risk

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Consumer Finance industry in the United Kingdom, you could be forgiven for feeling indifferent about Funding Circle Holdings plc's (LON:FCH) P/S ratio of 0.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Funding Circle Holdings

What Does Funding Circle Holdings' P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Funding Circle Holdings' revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Funding Circle Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Funding Circle Holdings' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 17%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 69% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Turning to the outlook, the next three years should generate growth of 30% per annum as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 18% per annum, which is noticeably less attractive.

With this in consideration, we find it intriguing that Funding Circle Holdings' P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Bottom Line On Funding Circle Holdings' P/S

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.

Looking at Funding Circle Holdings' analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

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

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.