A Piece Of The Puzzle Missing From Purple Group Limited's (JSE:PPE) 26% Share Price Climb

Purple Group Limited (JSE:PPE) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 28% in the last year.

Although its price has surged higher, there still wouldn't be many who think Purple Group's price-to-sales (or "P/S") ratio of 3.8x is worth a mention when the median P/S in South Africa's Capital Markets industry is similar at about 3.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Our free stock report includes 2 warning signs investors should be aware of before investing in Purple Group. Read for free now.

Check out our latest analysis for Purple Group

How Has Purple Group Performed Recently?

With revenue growth that's exceedingly strong of late, Purple Group has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Purple Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Purple Group's Revenue Growth Trending?

Purple Group's P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 40%. Pleasingly, revenue has also lifted 89% 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.

This is in contrast to the rest of the industry, which is expected to grow by 9.1% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Purple Group is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Purple Group's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We didn't quite envision Purple Group's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Purple Group, and understanding them should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.