To the annoyance of some shareholders, Allegiant Travel Company (NASDAQ:ALGT) shares are down a considerable 26% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 64% share price decline.

Even after such a large drop in price, there still wouldn’t be many who think Allegiant Travel’s price-to-sales (or “P/S”) ratio of 0.3x is worth a mention when the median P/S in the United States’ Airlines industry is similar at about 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Allegiant Travel

What Does Allegiant Travel’s P/S Mean For Shareholders?

While the industry has experienced revenue growth lately, Allegiant Travel’s revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn’t the case, investors might get caught out paying too much for the stock.

If you’d like to see what analysts are forecasting going forward, you should check out our free report on Allegiant Travel.

Do Revenue Forecasts Match The P/S Ratio?

The only time you’d be comfortable seeing a P/S like Allegiant Travel’s is when the company’s growth is tracking the industry closely.

Retrospectively, the last year delivered virtually the same number to the company’s top line as the year before. Although pleasingly revenue has lifted 108% in aggregate from three years ago, notwithstanding the last 12 months. Therefore, it’s fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Turning to the outlook, the next year should generate growth of 6.4% as estimated by the nine analysts watching the company. With the industry predicted to deliver 67% growth, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Allegiant Travel is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From Allegiant Travel’s P/S?

Allegiant Travel’s plummeting stock price has brought its P/S back to a similar region as the rest of the industry. 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.

Given that Allegiant Travel’s revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

We don’t want to rain on the parade too much, but we did also find 2 warning signs for Allegiant Travel (1 doesn’t sit too well with us!) that you need to be mindful of.

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.