What You Can Learn From Infratil Limited's (NZSE:IFT) P/S

When you see that almost half of the companies in the Diversified Financial industry in New Zealand have price-to-sales ratios (or "P/S") below 2.2x, Infratil Limited (NZSE:IFT) looks to be giving off some sell signals with its 3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for Infratil

What Does Infratil's P/S Mean For Shareholders?

Recent times have been advantageous for Infratil as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Infratil's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 57% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to remain somewhat buoyant, growing by 1.4% each year during the coming three years according to the four analysts following the company. This isn't typically strong growth, but with the rest of the industry predicted to shrink by 3.1% per annum, that would be a solid result.

With this in mind, we see why Infratil's P/S is a cut above its industry peers. At this time, shareholders aren't keen to offload something that is potentially eyeing a much more prosperous future.

The Bottom Line On Infratil's P/S

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.

As we anticipated, our review of Infratil's analyst forecasts shows that the company's better revenue forecast compared to a turbulent industry is a significant contributor to its high price-to-sales ratio. At this stage investors feel the potential for a deterioration in revenue is remote enough to justify paying a premium in the form of a high P/S. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Assuming the company's outlook remains unchanged, the share price is likely to be supported by prospective buyers.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Infratil (1 is a bit concerning!) that you need to be mindful of.

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.