Bango PLC’s (LON:BGO) price-to-sales (or “P/S”) ratio of 7x may look like a poor investment opportunity when you consider close to half the companies in the Software industry in the United Kingdom have P/S ratios below 2.6x. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
How Has Bango Performed Recently?
With revenue growth that’s superior to most other companies of late, Bango has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason.
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Do Revenue Forecasts Match The High P/S Ratio?
The only time you’d be truly comfortable seeing a P/S as steep as Bango’s is when the company’s growth is on track to outshine the industry decidedly.
Taking a look back first, we see that the company grew revenue by an impressive 38% last year. The strong recent performance means it was also able to grow revenue by 200% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 29% each year as estimated by the dual analysts watching the company. With the industry only predicted to deliver 9.6% each year, the company is positioned for a stronger revenue result.
In light of this, it’s understandable that Bango’s P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
What We Can Learn From Bango’s P/S?
It’s argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
We’ve established that Bango maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Software industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren’t under threat. It’s hard to see the share price falling strongly in the near future under these circumstances.
Many other vital risk factors can be found on the company’s balance sheet. Take a look at our free balance sheet analysis for Bango with six simple checks on some of these key factors.
Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.
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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.
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