Compass Diversified (NYSE:CODI) Doing What It Can To Lift Shares

With a price-to-sales (or "P/S") ratio of 0.8x Compass Diversified (NYSE:CODI) may be sending bullish signals at the moment, given that almost half of all the Diversified Financial companies in the United States have P/S ratios greater than 2.6x and even P/S higher than 5x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Compass Diversified

What Does Compass Diversified's P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Compass Diversified's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is Compass Diversified's Revenue Growth Trending?

Compass Diversified's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Retrospectively, the last year delivered a frustrating 8.6% decrease to the company's top line. Still, the latest three year period has seen an excellent 46% overall rise in revenue, in spite of its unsatisfying short-term performance. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 12% over the next year. That's shaping up to be materially higher than the 1.5% growth forecast for the broader industry.

With this information, we find it odd that Compass Diversified is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

The Key Takeaway

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.

To us, it seems Compass Diversified currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. There could be some major risk factors that are placing downward pressure on the P/S ratio. At least price risks look to be very low, but investors seem to think future revenues could see a lot of volatility.

It is also worth noting that we have found 2 warning signs for Compass Diversified (1 is a bit unpleasant!) that you need to take into consideration.

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

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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.