LexinFintech Holdings Ltd.'s (NASDAQ:LX) price-to-sales (or "P/S") ratio of 0.2x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Consumer Finance industry in the United States have P/S ratios greater than 1.3x. 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 LexinFintech Holdings' Recent Performance Look Like?

LexinFintech Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the share price, and thus the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. The latest three year period has also seen a 12% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 6.7% each year as estimated by the five analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 15% per annum, which is noticeably more attractive.

With this in consideration, its clear as to why LexinFintech Holdings' P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

The Final Word

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

As expected, our analysis of LexinFintech Holdings' analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

And what about other risks? Every company has them, and we've spotted 1 warning sign for LexinFintech Holdings you should know about.

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.

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.