At these prices, the risks to shareholder returns are greater for MoneyLion Inc. (NYSE:ML)

MoneyLion Inc (NYSE:ML) price-to-sales ratio (or “P/S”) of 1.8x may not seem like an attractive investment opportunity when you consider that nearly half of the companies in the Consumer Finance sector in the United States have a P/S- ratios below 1.2x. Nevertheless, we need to dig a little deeper to determine if there is a rational basis for the increased P/S.

Check out our latest analysis for MoneyLion

What does MoneyLion’s P/S mean for shareholders?

Recent times have been good for MoneyLion, as revenues have grown faster than most other companies. The price-to-earnings ratio is likely high as investors believe this strong revenue performance will continue. You’d really hope so, otherwise you’d be paying a pretty high price for no particular reason.

Want to know how analysts think MoneyLion’s future compares to the industry? In that case our free report is a good starting point.

How is MoneyLion’s turnover growth going?

There is an inherent assumption that a company must outperform the industry for P/S ratios like MoneyLion’s to be considered reasonable.

Looking at the past year of revenue growth, the company posted a whopping 24% increase. Spectacularly, three-year revenue growth has increased by several orders of magnitude, partly due to revenue growth over the past twelve months. So we can start by confirming that the company has done a great job of growing revenue during that time.

Looking to the future, estimates from the five analysts covering the company suggest that revenue should grow 23% over the next year. That appears to be significantly lower than the 33% growth forecast for the broader sector.

In light of this, it’s alarming that MoneyLion’s P/S is above the majority of other companies. Apparently, many investors in the company are much more optimistic than analysts indicate and are unwilling to let go of their shares at any price. There is a good chance that these shareholders will face future disappointment if the price-to-earnings ratio falls to a level more in line with growth prospects.

The most important takeaway

We would say that the price-to-sales ratio is not primarily a valuation tool, but rather a tool to gauge current investor sentiment and future expectations.

We have concluded that MoneyLion is currently trading at a much higher than expected price/earnings ratio, as its forecast growth is lower than that of the broader sector. At this point, we are uncomfortable with the high price-to-earnings ratio as projected future earnings are unlikely to support this positive sentiment for long. Unless these conditions improve significantly, it will be challenging to accept these prices as reasonable.

Before you take the next step, you should be aware of the 3 warning signs for MoneyLion that we have uncovered.

If companies with solid past earnings growth are for youyou might want to see this free collection of other companies with strong earnings growth and low price/earnings ratios.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.