Light & Wonder, Inc.'s (NASDAQ:LNW) Share Price Could Signal Some Risk

Light & Wonder, Inc.'s (NASDAQ:LNW) price-to-sales (or "P/S") ratio of 2.6x may not look like an appealing investment opportunity when you consider close to half the companies in the Hospitality industry in the United States have P/S ratios below 1.3x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Light & Wonder

How Light & Wonder Has Been Performing

With revenue growth that's inferior to most other companies of late, Light & Wonder has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

In order to justify its P/S ratio, Light & Wonder would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. Pleasingly, revenue has also lifted 35% 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 three years should generate growth of 6.5% each year as estimated by the twelve analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 13% per annum, which is noticeably more attractive.

With this information, we find it concerning that Light & Wonder is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Light & Wonder'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.

We've concluded that Light & Wonder currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Light & Wonder (1 shouldn't be ignored!) that you should be aware of before investing here.

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.