Raspberry Pi Holdings plc (LON:RPI) Not Lagging Industry On Growth Or Pricing

Raspberry Pi Holdings plc's (LON:RPI) price-to-sales (or "P/S") ratio of 4.1x may look like a poor investment opportunity when you consider close to half the companies in the Tech industry in the United Kingdom have P/S ratios below 0.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for Raspberry Pi Holdings

What Does Raspberry Pi Holdings' P/S Mean For Shareholders?

Raspberry Pi Holdings hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Raspberry Pi Holdings' Revenue Growth Trending?

Raspberry Pi Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 2.4% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 85% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 6.5% per year growth forecast for the broader industry.

With this information, we can see why Raspberry Pi Holdings is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

As we suspected, our examination of Raspberry Pi Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Raspberry Pi Holdings (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

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.