Avantium N.V.'s (AMS:AVTX) P/S Still Appears To Be Reasonable

When close to half the companies in the Professional Services industry in the Netherlands have price-to-sales ratios (or "P/S") below 1.4x, you may consider Avantium N.V. (AMS:AVTX) as a stock to avoid entirely with its 6.4x 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 so lofty.

View our latest analysis for Avantium

How Avantium Has Been Performing

Avantium certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Avantium will help you uncover what's on the horizon.

How Is Avantium's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 80% last year. The strong recent performance means it was also able to grow revenue by 56% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 55% per annum during the coming three years according to the five analysts following the company. That's shaping up to be materially higher than the 5.4% each year growth forecast for the broader industry.

With this information, we can see why Avantium is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Avantium'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.

As we suspected, our examination of Avantium's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Avantium, and understanding these should be part of your investment process.

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