Compass Diversified's (NYSE:CODI) Business And Shares Still Trailing The Industry
When you see that almost half of the companies in the Diversified Financial industry in the United States have price-to-sales ratios (or "P/S") above 2.2x, Compass Diversified (NYSE:CODI) looks to be giving off some buy signals with its 0.6x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.
View our latest analysis for Compass Diversified
What Does Compass Diversified's Recent Performance Look Like?
With revenue growth that's superior to most other companies of late, Compass Diversified has been doing relatively well. One possibility is that the P/S ratio is low because investors think this strong revenue performance might be less impressive moving forward. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Want the full picture on analyst estimates for the company? Then our free report on Compass Diversified will help you uncover what's on the horizon.
Is There Any Revenue Growth Forecasted For Compass Diversified?
In order to justify its P/S ratio, Compass Diversified would need to produce sluggish growth that's trailing the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 17%. The strong recent performance means it was also able to grow revenue by 79% 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 year should generate growth of 2.7% as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 10%, which is noticeably more attractive.
With this information, we can see why Compass Diversified is trading at a P/S lower than the industry. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.
The Bottom Line On Compass Diversified'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.
As we suspected, our examination of Compass Diversified's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.
Before you settle on your opinion, we've discovered 3 warning signs for Compass Diversified (2 are significant!) that you should be aware of.
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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