United Foodbrands Limited (NSE:UFBL) Surges 25% Yet Its Low P/S Is No Reason For Excitement
Those holding United Foodbrands Limited (NSE:UFBL) shares would be relieved that the share price has rebounded 25% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 47% in the last twelve months.
In spite of the firm bounce in price, United Foodbrands' price-to-sales (or "P/S") ratio of 0.7x might still make it look like a strong buy right now compared to the wider Hospitality industry in India, where around half of the companies have P/S ratios above 3.6x and even P/S above 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.
See our latest analysis for United Foodbrands
What Does United Foodbrands' P/S Mean For Shareholders?
For example, consider that United Foodbrands' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.
Although there are no analyst estimates available for United Foodbrands, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.What Are Revenue Growth Metrics Telling Us About The Low P/S?
In order to justify its P/S ratio, United Foodbrands would need to produce anemic growth that's substantially trailing the industry.
Retrospectively, the last year delivered a frustrating 1.4% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 5.2% in aggregate from three years ago, thanks to the earlier period of growth. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.
This is in contrast to the rest of the industry, which is expected to grow by 60% over the next year, materially higher than the company's recent medium-term annualised growth rates.
With this in consideration, it's easy to understand why United Foodbrands' P/S falls short of the mark set by its industry peers. 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.
What We Can Learn From United Foodbrands' P/S?
Even after such a strong price move, United Foodbrands' P/S still trails the rest of the industry. 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 United Foodbrands revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.
Before you settle on your opinion, we've discovered 1 warning sign for United Foodbrands that you should be aware of.
If you're unsure about the strength of United Foodbrands' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.
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