Subdued Growth No Barrier To Bright Horizons Family Solutions Inc.'s (NYSE:BFAM) Price

When close to half the companies in the Consumer Services industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, you may consider Bright Horizons Family Solutions Inc. (NYSE:BFAM) as a stock to potentially avoid with its 2.7x 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 as high as it is.

View our latest analysis for Bright Horizons Family Solutions

How Bright Horizons Family Solutions Has Been Performing

Bright Horizons Family Solutions' revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. 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 Bright Horizons Family Solutions will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

Bright Horizons Family Solutions' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company grew revenue by an impressive 20% last year. The strong recent performance means it was also able to grow revenue by 60% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the ten analysts covering the company suggest revenue should grow by 8.7% per annum over the next three years. With the industry predicted to deliver 15% growth per year, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Bright Horizons Family Solutions' P/S sits above the majority of other companies. 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. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Bright Horizons Family Solutions, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

Plus, you should also learn about these 2 warning signs we've spotted with Bright Horizons Family Solutions.

If these risks are making you reconsider your opinion on Bright Horizons Family Solutions, explore our interactive list of high quality stocks to get an idea of what else is out there.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.