Brilliant Future AB (publ)'s (STO:BRILL) Low P/S No Reason For Excitement

Brilliant Future AB (publ)'s (STO:BRILL) price-to-sales (or "P/S") ratio of 0.8x might make it look like a buy right now compared to the Software industry in Sweden, where around half of the companies have P/S ratios above 2.6x and even P/S above 6x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for Brilliant Future

How Has Brilliant Future Performed Recently?

For example, consider that Brilliant Future's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. Those who are bullish on Brilliant Future will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Brilliant Future will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

Retrospectively, the last year delivered a frustrating 1.2% decrease to the company's top line. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 5.7% shows it's noticeably less attractive.

In light of this, it's understandable that Brilliant Future's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

In line with expectations, Brilliant Future maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Brilliant Future that you should be aware 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.