There wouldn't be many who think United Malt Group Limited's (ASX:UMG) price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S for the Food industry in Australia is similar at about 0.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
Check out our latest analysis for United Malt Group
How United Malt Group Has Been Performing
There hasn't been much to differentiate United Malt Group's and the industry's revenue growth lately. It seems that many are expecting the mediocre revenue performance to persist, which has held the P/S ratio back. Those who are bullish on United Malt Group will be hoping that revenue performance can pick up, so that they can pick up the stock at a slightly lower valuation.
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Is There Some Revenue Growth Forecasted For United Malt Group?
In order to justify its P/S ratio, United Malt Group would need to produce growth that's similar to the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 16%. The latest three year period has also seen a 17% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.
Looking ahead now, revenue is anticipated to climb by 2.4% per annum during the coming three years according to the eight analysts following the company. With the industry predicted to deliver 6.3% growth per year, the company is positioned for a weaker revenue result.
With this information, we find it interesting that United Malt Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
The Key Takeaway
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.
Given that United Malt Group'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. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.