When you see that almost half of the companies in the Consumer Finance industry in the United States have price-to-sales ratios (or "P/S") above 1.4x, Yiren Digital Ltd. (NYSE:YRD) looks to be giving off some buy signals with its 0.6x 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.
What Does Yiren Digital's Recent Performance Look Like?
Yiren Digital 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 Yiren Digital, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.Is There Any Revenue Growth Forecasted For Yiren Digital?
The only time you'd be truly comfortable seeing a P/S as low as Yiren Digital's is when the company's growth is on track to lag the industry.
Taking a look back first, we see that the company grew revenue by an impressive 29% last year. The latest three year period has also seen a 24% overall rise in revenue, aided extensively by its short-term performance. Therefore, it's fair to say the revenue growth recently has been respectable for the company.
Comparing that to the industry, which is predicted to deliver 32% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.
With this information, we can see why Yiren Digital is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.
What We Can Learn From Yiren Digital's P/S?
We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.
Our examination of Yiren Digital confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
The company's balance sheet is another key area for risk analysis. Our free balance sheet analysis for Yiren Digital with six simple checks will allow you to discover any risks that could be an issue.
If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.
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.
