You may think that with a price-to-sales (or "P/S") ratio of 0.5x Babylon Pump & Power Limited (ASX:BPP) is a stock worth checking out, seeing as almost half of all the Trade Distributors companies in Australia have P/S ratios greater than 1.3x and even P/S higher than 4x aren't out of the ordinary. 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 Babylon Pump & Power

How Has Babylon Pump & Power Performed Recently?

Babylon Pump & Power has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Although there are no analyst estimates available for Babylon Pump & Power, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Babylon Pump & Power's Revenue Growth Trending?

In order to justify its P/S ratio, Babylon Pump & Power would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. Pleasingly, revenue has also lifted 93% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

This is in contrast to the rest of the industry, which is expected to grow by 2.2% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Babylon Pump & Power's P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

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.

Our examination of Babylon Pump & Power revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Babylon Pump & Power that you need to be mindful of.

If these risks are making you reconsider your opinion on Babylon Pump & Power, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.

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