When you see that almost half of the companies in the Consumer Services industry in the United States have price-to-sales ratios (or "P/S") above 1.5x, Graham Holdings Company (NYSE:GHC) looks to be giving off some buy signals with its 0.7x 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.

How Graham Holdings Has Been Performing

Graham Holdings could be doing better as it's been growing revenue less than most other companies lately. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

How Is Graham Holdings' Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Graham Holdings' to be considered reasonable.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 58% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.2% during the coming year according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 15%, which is noticeably more attractive.

In light of this, it's understandable that Graham Holdings' P/S sits below the majority of other companies. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Key Takeaway

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.

We've established that Graham Holdings maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Plus, you should also learn about these 3 warning signs we've spotted with Graham Holdings (including 1 which doesn't sit too well with us).

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.