Retail Food Group Limited (ASX:RFG) Surges 29% Yet Its Low P/S Is No Reason For Excitement

Retail Food Group Limited (ASX:RFG) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 44% over that time.

In spite of the firm bounce in price, when close to half the companies operating in Australia's Hospitality industry have price-to-sales ratios (or "P/S") above 1.6x, you may still consider Retail Food Group as an enticing stock to check out with its 0.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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See our latest analysis for Retail Food Group

How Retail Food Group Has Been Performing

Retail Food Group certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. It might be that many expect the strong revenue performance to degrade substantially, possibly more than the industry, which has repressed the P/S. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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Is There Any Revenue Growth Forecasted For Retail Food Group?

The only time you'd be truly comfortable seeing a P/S as low as Retail Food Group's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. Pleasingly, revenue has also lifted 34% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue growth is heading into negative territory, declining 4.4% per annum over the next three years. That's not great when the rest of the industry is expected to grow by 6.2% per annum.

With this in consideration, we find it intriguing that Retail Food Group's P/S is closely matching its industry peers. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift Retail Food Group's P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Retail Food Group's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Retail Food Group that you need to be mindful of.

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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.