You may think that with a price-to-sales (or "P/S") ratio of 0.9x Zhihu Inc. (NYSE:ZH) is a stock worth checking out, seeing as almost half of all the Interactive Media and Services companies in the United States have P/S ratios greater than 1.7x and even P/S higher than 4x aren't out of the ordinary.   However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.  

View our latest analysis for Zhihu

NYSE:ZH Price to Sales Ratio vs Industry January 6th 2024

How Zhihu Has Been Performing

With revenue growth that's superior to most other companies of late, Zhihu has been doing relatively well.   Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed.  If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.    

Keen to find out how analysts think Zhihu's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Zhihu's Revenue Growth Trending?  

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

If we review the last year of revenue growth, the company posted a terrific increase of 19%.   The strong recent performance means it was also able to grow revenue by 295% in total over the last three years.  So we can start by confirming that the company has done a great job of growing revenue over that time.  

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 15% per annum over the next three years.  With the industry only predicted to deliver 12% per annum, the company is positioned for a stronger revenue result.

In light of this, it's peculiar that Zhihu's P/S sits below the majority of other companies.  It looks like most investors are not convinced at all that the company can achieve future growth expectations.  

What Does Zhihu's P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Zhihu's analyst forecasts revealed that its superior revenue outlook isn't contributing to its P/S anywhere near as much as we would have predicted.  There could be some major risk factors that are placing downward pressure on the P/S ratio.  While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.    

A lot of potential risks can sit within a company's balance sheet.  Our free balance sheet analysis for Zhihu  with six simple checks will allow you to discover any risks that could be an issue.  

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).

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.