There's Reason For Concern Over Morningstar, Inc.'s (NASDAQ:MORN) Price

When you see that almost half of the companies in the Capital Markets industry in the United States have price-to-sales ratios (or "P/S") below 3.3x, Morningstar, Inc. (NASDAQ:MORN) looks to be giving off strong sell signals with its 6.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Morningstar

What Does Morningstar's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Morningstar 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. If not, then existing shareholders may be very nervous about the viability of the share price.

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

How Is Morningstar's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 13% gain to the company's revenues. The latest three year period has also seen an excellent 40% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 7.8% per year as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 7.8% each year, which is not materially different.

With this in consideration, we find it intriguing that Morningstar's P/S is higher than its industry peers. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Morningstar currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. 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.

You always need to take note of risks, for example - Morningstar has 1 warning sign we think you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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.