Chorus Limited's (NZSE:CNU) Popularity With Investors Is Under Threat From Overpricing

Chorus Limited's (NZSE:CNU) price-to-sales (or "P/S") ratio of 3.8x may look like a poor investment opportunity when you consider close to half the companies in the Telecom industry in New Zealand have P/S ratios below 1.1x. 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.

Check out our latest analysis for Chorus

How Has Chorus Performed Recently?

There hasn't been much to differentiate Chorus' and the industry's revenue growth lately. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Chorus' Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 3.1% gain to the company's revenues. Revenue has also lifted 5.8% 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 actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 2.9% per annum during the coming three years according to the six analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 3.3% per annum, which is not materially different.

With this information, we find it interesting that Chorus is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Chorus' P/S Mean For Investors?

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Analysts are forecasting Chorus' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

Plus, you should also learn about these 2 warning signs we've spotted with Chorus.

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.