Vista Group International Limited's (NZSE:VGL) 26% Price Boost Is Out Of Tune With Revenues

The Vista Group International Limited (NZSE:VGL) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 116% in the last year.

After such a large jump in price, Vista Group International may be sending sell signals at present with a price-to-sales (or "P/S") ratio of 6.3x, when you consider almost half of the companies in the Software industry in New Zealand have P/S ratios under 4.4x and even P/S lower than 1.4x aren't out of the ordinary. 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 Vista Group International

How Has Vista Group International Performed Recently?

With revenue growth that's inferior to most other companies of late, Vista Group International has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a decent 4.9% gain to the company's revenues. The latest three year period has also seen an excellent 53% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the six analysts covering the company suggest revenue should grow by 14% per year over the next three years. That's shaping up to be materially lower than the 20% per annum growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Vista Group International's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Vista Group International shares have taken a big step in a northerly direction, but its P/S is elevated as a result. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Vista Group International, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Vista Group International with six simple checks will allow you to discover any risks that could be an issue.

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.