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

It's not a stretch to say that Woolworths Group Limited's (ASX:WOW) price-to-sales (or "P/S") ratio of 0.7x right now seems quite "middle-of-the-road" for companies in the Consumer Retailing industry in Australia, where the median P/S ratio is around 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

What Does Woolworths Group's Recent Performance Look Like?

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 you like the company, you'd be hoping this can at least be maintained so that you could pick up some stock while it's not quite in favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Woolworths Group.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Woolworths Group's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.9% last year. Pleasingly, revenue has also lifted 31% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 3.4% each year during the coming three years according to the analysts following the company. With the industry predicted to deliver 3.5% growth per year, the company is positioned for a comparable revenue result.

In light of this, it's understandable that Woolworths Group's P/S sits in line with the majority of other companies. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Final Word

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. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

Having said that, be aware Woolworths Group is showing 2 warning signs in our investment analysis, and 1 of those can't be ignored.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com