To the annoyance of some shareholders, Four Seasons Education (Cayman) Inc. (NYSE:FEDU) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 28% share price drop.
In spite of the heavy fall in price, when close to half the companies operating in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") above 1.6x, you may still consider Four Seasons Education (Cayman) as an enticing stock to check out with its 0.5x 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.
See our latest analysis for Four Seasons Education (Cayman)
How Four Seasons Education (Cayman) Has Been Performing
With revenue growth that's exceedingly strong of late, Four Seasons Education (Cayman) has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Four Seasons Education (Cayman) will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.
We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Four Seasons Education (Cayman)'s earnings, revenue and cash flow.Do Revenue Forecasts Match The Low P/S Ratio?
Four Seasons Education (Cayman)'s P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 141%. Still, revenue has fallen 37% in total from three years ago, which is quite disappointing. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.
In contrast to the company, the rest of the industry is expected to grow by 12% over the next year, which really puts the company's recent medium-term revenue decline into perspective.
In light of this, it's understandable that Four Seasons Education (Cayman)'s P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.
The Final Word
The southerly movements of Four Seasons Education (Cayman)'s shares means its P/S is now sitting at a pretty low level. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.
As we suspected, our examination of Four Seasons Education (Cayman) revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.
Having said that, be aware Four Seasons Education (Cayman) is showing 3 warning signs in our investment analysis, and 1 of those can't be ignored.
It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).
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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.