Redcentric plc's (LON:RCN) Price In Tune With Revenues

With a median price-to-sales (or "P/S") ratio of close to 1.4x in the IT industry in the United Kingdom, you could be forgiven for feeling indifferent about Redcentric plc's (LON:RCN) P/S ratio of 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Redcentric

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

Recent times have been advantageous for Redcentric as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

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

If we review the last year of revenue growth, the company posted a terrific increase of 47%. Pleasingly, revenue has also lifted 79% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 4.2% as estimated by the sole analyst watching the company. That's shaping up to be similar to the 5.6% growth forecast for the broader industry.

With this information, we can see why Redcentric is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Redcentric's P/S

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.

We've seen that Redcentric maintains an adequate P/S seeing as its revenue growth figures match the rest of the industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. Unless these conditions change, they will continue to support the share price at these levels.

You should always think about risks. Case in point, we've spotted 1 warning sign for Redcentric you should be aware of.

If you're unsure about the strength of Redcentric'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.