With Avantium N.V. (AMS:AVTX) It Looks Like You'll Get What You Pay For

Avantium N.V.'s (AMS:AVTX) price-to-sales (or "P/S") ratio of 11.2x may look like a poor investment opportunity when you consider close to half the companies in the Professional Services industry in the Netherlands have P/S ratios below 0.7x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Avantium

What Does Avantium's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Avantium has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think Avantium's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Avantium?

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 managed to grow revenues by a handy 11% last year. Pleasingly, revenue has also lifted 100% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 60% per annum as estimated by the four analysts watching the company. With the industry only predicted to deliver 6.4% each year, the company is positioned for a stronger revenue result.

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.

What Does Avantium's P/S Mean For Investors?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Avantium maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Professional Services industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 3 warning signs for Avantium you should be aware of, and 1 of them is concerning.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.