Investor Optimism Abounds Adient plc (NYSE:ADNT) But Growth Is Lacking

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Auto Components industry in the United States, you could be forgiven for feeling indifferent about Adient plc's (NYSE:ADNT) P/S ratio of 0.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Adient

How Adient Has Been Performing

With revenue growth that's inferior to most other companies of late, Adient has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Adient's Revenue Growth Trending?

In order to justify its P/S ratio, Adient would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 5.4% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 5.3% per year over the next three years. That's shaping up to be materially lower than the 16% per annum growth forecast for the broader industry.

In light of this, it's curious that Adient's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Adient'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.

Our look at the analysts forecasts of Adient's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Adient (1 is a bit concerning) you should be aware of.

If you're unsure about the strength of Adient's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.