Risks To Shareholder Returns Are Elevated At These Prices For Global Payments Inc. (NYSE:GPN)

When you see that almost half of the companies in the Diversified Financial industry in the United States have price-to-sales ratios (or "P/S") below 2.5x, Global Payments Inc. (NYSE:GPN) looks to be giving off some sell signals with its 3.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Global Payments

What Does Global Payments' Recent Performance Look Like?

Global Payments could be doing better as it's been growing revenue less than most other companies lately. 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 Global Payments.

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

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

If we review the last year of revenue growth, the company posted a worthy increase of 6.2%. The solid recent performance means it was also able to grow revenue by 27% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 2.5% per year over the next three years. With the industry predicted to deliver 8.8% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Global Payments 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.

The Final Word

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.

It comes as a surprise to see Global Payments trade at such a high P/S given the revenue forecasts look less than stellar. 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.

Having said that, be aware Global Payments is showing 3 warning signs in our investment analysis, and 1 of those is a bit unpleasant.

If these risks are making you reconsider your opinion on Global Payments, 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.