Some Confidence Is Lacking In Transcat, Inc.'s (NASDAQ:TRNS) P/S

When you see that almost half of the companies in the Trade Distributors industry in the United States have price-to-sales ratios (or "P/S") below 1.1x, Transcat, Inc. (NASDAQ:TRNS) looks to be giving off strong sell signals with its 4.2x P/S ratio. 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.

View our latest analysis for Transcat

What Does Transcat's Recent Performance Look Like?

Transcat certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Transcat would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The latest three year period has also seen an excellent 47% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 6.2% per year during the coming three years according to the five analysts following the company. That's shaping up to be similar to the 6.2% per year growth forecast for the broader industry.

In light of this, it's curious that Transcat's P/S sits above the majority of other companies. 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 Transcat's P/S Mean For Investors?

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Transcat currently trades on a higher than expected P/S. 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. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Transcat, and understanding these should be part of your investment process.

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.