When you see that almost half of the companies in the Transportation industry in the United States have price-to-sales ratios (or "P/S") below 0.8x, Full Truck Alliance Co. Ltd. (NYSE:YMM) looks to be giving off strong sell signals with its 6.7x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Full Truck Alliance
NYSE:YMM Price to Sales Ratio vs Industry December 18th 2023
How Full Truck Alliance Has Been Performing
Recent times have been advantageous for Full Truck Alliance as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
Keen to find out how analysts think Full Truck Alliance's future stacks up against the industry? In that case, our free report is a great place to start.
What Are Revenue Growth Metrics Telling Us About The High P/S?
There's an inherent assumption that a company should far outperform the industry for P/S ratios like Full Truck Alliance's to be considered reasonable.
If we review the last year of revenue growth, the company posted a terrific increase of 27%. The strong recent performance means it was also able to grow revenue by 240% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Turning to the outlook, the next three years should generate growth of 23% per year as estimated by the ten analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 9.7% each year, which is noticeably less attractive.
In light of this, it's understandable that Full Truck Alliance's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.
The Key Takeaway
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 into Full Truck Alliance shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.
The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Full Truck Alliance with six simple checks on some of these key factors.
If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).
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