Why Investors Shouldn't Be Surprised By Reading International, Inc.'s (NASDAQ:RDI) Low P/S

With a price-to-sales (or "P/S") ratio of 0.1x Reading International, Inc. (NASDAQ:RDI) may be sending bullish signals at the moment, given that almost half of all the Entertainment companies in the United States have P/S ratios greater than 1.8x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Reading International

What Does Reading International's Recent Performance Look Like?

Reading International could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Keen to find out how analysts think Reading International's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Reading International's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Reading International's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.6% last year. Revenue has also lifted 18% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 7.1% as estimated by the lone analyst watching the company. With the industry predicted to deliver 26% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Reading International is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

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.

As expected, our analysis of Reading International's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 3 warning signs for Reading International that we have uncovered.

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.