Improved Revenues Required Before Controladora Axtel S.A.B. de C.V. (BMV:CTAXTELA) Shares Find Their Feet

When close to half the companies operating in the Telecom industry in Mexico have price-to-sales ratios (or "P/S") above 1.5x, you may consider Controladora Axtel S.A.B. de C.V. (BMV:CTAXTELA) as an attractive investment with its 0.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Controladora Axtel. de

How Controladora Axtel. de Has Been Performing

Controladora Axtel. de has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Controladora Axtel. de will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Controladora Axtel. de's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as low as Controladora Axtel. de's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 4.5%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 11% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 13% shows it's an unpleasant look.

In light of this, it's understandable that Controladora Axtel. de's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

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.

Our examination of Controladora Axtel. de confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Controladora Axtel. de has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

If you're unsure about the strength of Controladora Axtel. de's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.