With a median price-to-sales (or "P/S") ratio of close to 1.3x in the Commercial Services industry in the United States, you could be forgiven for feeling indifferent about Driven Brands Holdings Inc.'s (NASDAQ:DRVN) P/S ratio of 0.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
NasdaqGS:DRVN Price to Sales Ratio vs Industry May 3rd 2024
How Has Driven Brands Holdings Performed Recently?
Recent times haven't been great for Driven Brands Holdings as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. However, if this isn't the case, investors might get caught out paying too much for the stock.
Keen to find out how analysts think Driven Brands Holdings' future stacks up against the industry? In that case, our free report is a great place to start.
How Is Driven Brands Holdings' Revenue Growth Trending?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Driven Brands Holdings' to be considered reasonable.
Taking a look back first, we see that the company managed to grow revenues by a handy 8.9% last year. The latest three year period has also seen an excellent 120% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 8.6% per year over the next three years. With the industry predicted to deliver 19% growth per annum, the company is positioned for a weaker revenue result.
With this in mind, we find it intriguing that Driven Brands Holdings' P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
The Final Word
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
Our look at the analysts forecasts of Driven Brands Holdings' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Driven Brands Holdings that you should be aware of.
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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