Rumo S.A.'s (BVMF:RAIL3) Shareholders Might Be Looking For Exit

When you see that almost half of the companies in the Transportation industry in Brazil have price-to-sales ratios (or "P/S") below 1.1x, Rumo S.A. (BVMF:RAIL3) looks to be giving off some sell signals with its 3x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Rumo

How Rumo Has Been Performing

There hasn't been much to differentiate Rumo's and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. 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 Rumo.

Is There Enough Revenue Growth Forecasted For Rumo?

In order to justify its P/S ratio, Rumo would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered an exceptional 21% gain to the company's top line. Pleasingly, revenue has also lifted 63% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 7.9% each year during the coming three years according to the twelve analysts following the company. With the industry predicted to deliver 15% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's alarming that Rumo's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Final Word

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

It comes as a surprise to see Rumo trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Rumo with six simple checks will allow you to discover any risks that could be an issue.

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.