Stagwell Inc.'s (NASDAQ:STGW) price-to-sales (or "P/S") ratio of 0.3x might make it look like a buy right now compared to the Media industry in the United States, where around half of the companies have P/S ratios above 1x and even P/S above 3x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

What Does Stagwell's Recent Performance Look Like?

While the industry has experienced revenue growth lately, Stagwell's revenue has gone into reverse gear, which is not great. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Is There Any Revenue Growth Forecasted For Stagwell?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.0%. Still, the latest three year period has seen an excellent 185% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Looking ahead now, revenue is anticipated to climb by 7.2% each year during the coming three years according to the six analysts following the company. With the industry only predicted to deliver 4.3% per annum, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Stagwell's P/S sits below the majority of other companies. It looks like most investors are not convinced at all that the company can achieve future growth expectations.

What We Can Learn From Stagwell's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Stagwell's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Stagwell (at least 1 which doesn't sit too well with us), 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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