With a median price-to-sales (or "P/S") ratio of close to 0.9x in the Food industry in the United States, you could be forgiven for feeling indifferent about Mission Produce, Inc.'s (NASDAQ:AVO) P/S ratio of 0.8x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.
What Does Mission Produce's Recent Performance Look Like?
Mission Produce certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. 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 Mission Produce's future stacks up against the industry? In that case, our free report is a great place to start.
Is There Some Revenue Growth Forecasted For Mission Produce?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Mission Produce's to be considered reasonable.
If we review the last year of revenue growth, the company posted a terrific increase of 22%. The strong recent performance means it was also able to grow revenue by 32% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 4.8% as estimated by the two analysts watching the company. Meanwhile, the broader industry is forecast to expand by 2.7%, which paints a poor picture.
In light of this, it's somewhat alarming that Mission Produce's P/S sits in line with the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.
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.
It appears that Mission Produce currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If the poor revenue outlook tells us one thing, it's that these current price levels could be unsustainable.
And what about other risks? Every company has them, and we've spotted 2 warning signs for Mission Produce (of which 1 is significant!) you should know about.
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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