Woolworths Group Limited's (ASX:WOW) P/S Still Appears To Be Reasonable

With a median price-to-sales (or "P/S") ratio of close to 0.5x in the Consumer Retailing industry in Australia, you could be forgiven for feeling indifferent about Woolworths Group Limited's (ASX:WOW) P/S ratio of 0.6x. 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 Woolworths Group

How Has Woolworths Group Performed Recently?

Woolworths Group's revenue growth of late has been pretty similar to most other companies. The P/S ratio is probably moderate because investors think this modest revenue performance will continue. If this is the case, then at least existing shareholders won't be losing sleep over the current share price.

Keen to find out how analysts think Woolworths Group's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Woolworths Group would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 5.9% gain to the company's revenues. Pleasingly, revenue has also lifted 31% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 3.6% each year over the next three years. That's shaping up to be similar to the 3.4% each year growth forecast for the broader industry.

With this information, we can see why Woolworths Group is trading at a fairly similar P/S to the industry. Apparently shareholders are comfortable to simply hold on while the company is keeping a low profile.

The Key Takeaway

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our look at Woolworths Group's revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. Unless these conditions change, they will continue to support the share price at these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Woolworths Group (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Woolworths Group's 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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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.