Those holding ATA Creativity Global (NASDAQ:AACG) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 31% over that time.

Although its price has surged higher, when close to half the companies operating in the United States' Consumer Services industry have price-to-sales ratios (or "P/S") above 1.5x, you may still consider ATA Creativity Global as an enticing stock to check out with its 0.7x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

What Does ATA Creativity Global's Recent Performance Look Like?

Revenue has risen firmly for ATA Creativity Global recently, which is pleasing to see. 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. Those who are bullish on ATA Creativity Global will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Is There Any Revenue Growth Forecasted For ATA Creativity Global?

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

If we review the last year of revenue growth, the company posted a terrific increase of 16%. The latest three year period has also seen an excellent 37% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

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

The Key Takeaway

ATA Creativity Global's stock price has surged recently, but its but its P/S still remains modest. 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.

As we suspected, our examination of ATA Creativity Global revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Plus, you should also learn about these 2 warning signs we've spotted with ATA Creativity Global.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.