Revenues Tell The Story For Infratil Limited (NZSE:IFT)

Infratil Limited's (NZSE:IFT) price-to-sales (or "P/S") ratio of 3.1x may not look like an appealing investment opportunity when you consider close to half the companies in the Diversified Financial industry in New Zealand have P/S ratios below 2.2x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Infratil

How Infratil Has Been Performing

Recent times have been advantageous for Infratil as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Infratil'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 Infratil?

Infratil's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 23%. The latest three year period has also seen an excellent 197% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should bring diminished returns, with revenue decreasing 2.4% per annum as estimated by the five analysts watching the company. Meanwhile, the industry is forecast to moderate by 5.5% per year, which indicates the company should perform better regardless.

With this information, it's not too hard to see why Infratil is trading at a higher P/S in comparison. However, even though the company may outperform the industry, shrinking revenues are unlikely to make the P/S premium sustainable long-term. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As per our expectations, it looks as if Infratil's analyst forecasts revealed that its less shaky outlook against the industry is contributing to its high P/S. At this stage investors feel the potential for outperforming a struggling industry justifies a higher P/S than other companies in the space. Uncertainty still lies over whether they can limit their revenue decline given the issues the broader industry are facing. Otherwise, it's hard to see the share price falling strongly in the near future if they continue to outperform similar companies.

Plus, you should also learn about this 1 warning sign we've spotted with Infratil.

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.