Construction Partners, Inc.'s (NASDAQ:ROAD) P/S Is Still On The Mark Following 29% Share Price Bounce

Construction Partners, Inc. (NASDAQ:ROAD) shareholders have had their patience rewarded with a 29% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 88%.

Since its price has surged higher, you could be forgiven for thinking Construction Partners is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.6x, considering almost half the companies in the United States' Construction industry have P/S ratios below 1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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How Construction Partners Has Been Performing

Construction Partners certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Construction Partners will help you uncover what's on the horizon.

How Is Construction Partners' Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 31% last year. Pleasingly, revenue has also lifted 105% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 35% as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 9.5% growth forecast for the broader industry.

With this information, we can see why Construction Partners is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Construction Partners' P/S is on the rise since its shares have risen strongly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Construction Partners maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Construction industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Construction Partners (1 is a bit unpleasant!) that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.