When close to half the companies in the Hospitality industry in the United States have price-to-sales ratios (or "P/S") below 1.2x, you may consider Six Flags Entertainment Corporation (NYSE:SIX) as a stock to potentially avoid with its 1.8x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for Six Flags Entertainment
How Six Flags Entertainment Has Been Performing
With revenue growth that's inferior to most other companies of late, Six Flags Entertainment has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Six Flags Entertainment.How Is Six Flags Entertainment's Revenue Growth Trending?
There's an inherent assumption that a company should outperform the industry for P/S ratios like Six Flags Entertainment's to be considered reasonable.
If we review the last year of revenue growth, the company posted a worthy increase of 4.0%. The latest three year period has seen an incredible overall rise in revenue, even though the last 12 month performance was only fair. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Shifting to the future, estimates from the twelve analysts covering the company suggest revenue should grow by 6.2% over the next year. With the industry predicted to deliver 13% growth, the company is positioned for a weaker revenue result.
With this information, we find it concerning that Six Flags Entertainment is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.
What We Can Learn From Six Flags Entertainment's P/S?
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.
We've concluded that Six Flags Entertainment currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.
Plus, you should also learn about these 4 warning signs we've spotted with Six Flags Entertainment (including 2 which shouldn't be ignored).
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).
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com