Saga plc's (LON:SAGA) Shares Bounce 29% But Its Business Still Trails The Industry

Saga plc (LON:SAGA) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 108% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, considering around half the companies operating in the United Kingdom's Insurance industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider Saga as an solid investment opportunity with its 0.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for Saga

What Does Saga's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Saga has been doing relatively well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

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

Do Revenue Forecasts Match The Low P/S Ratio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 19%. The latest three year period has also seen a 16% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 6.1% over the next year. That's shaping up to be materially lower than the 38% growth forecast for the broader industry.

With this information, we can see why Saga is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Bottom Line On Saga's P/S

Saga's stock price has surged recently, but its but its P/S still remains modest. 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.

We've established that Saga maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Saga with six simple checks.

If you're unsure about the strength of Saga's 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.