Unpleasant Surprises Could Be In Store For Cincinnati Financial Corporation's (NASDAQ:CINF) Shares

When close to half the companies in the Insurance industry in the United States have price-to-sales ratios (or "P/S") below 1x, you may consider Cincinnati Financial Corporation (NASDAQ:CINF) as a stock to potentially avoid with its 1.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Cincinnati Financial

What Does Cincinnati Financial's P/S Mean For Shareholders?

Recent times have been advantageous for Cincinnati Financial as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. 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 Cincinnati Financial.

How Is Cincinnati Financial's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Cincinnati Financial's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 44% gain to the company's top line. Pleasingly, revenue has also lifted 40% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 3.1% during the coming year according to the eight analysts following the company. With the industry predicted to deliver 6.3% growth, that's a disappointing outcome.

With this in mind, we find it intriguing that Cincinnati Financial's P/S is closely matching its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a very good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative 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.

For a company with revenues that are set to decline in the context of a growing industry, Cincinnati Financial's P/S is much higher than we would've anticipated. In cases like this where we see revenue decline on the horizon, we suspect the share price is at risk of following suit, bringing back the high P/S into the realms of suitability. Unless these conditions improve markedly, it'll be a challenging time for shareholders.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Cincinnati Financial, and understanding should be part of your investment process.

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).

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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.