With Bubs Australia Limited (ASX:BUB) It Looks Like You'll Get What You Pay For

Bubs Australia Limited's (ASX:BUB) price-to-sales (or "P/S") ratio of 1.8x may not look like an appealing investment opportunity when you consider close to half the companies in the Food industry in Australia have P/S ratios below 1x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Bubs Australia

How Has Bubs Australia Performed Recently?

With revenue growth that's superior to most other companies of late, Bubs Australia has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Bubs Australia will help you uncover what's on the horizon.

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

The only time you'd be truly comfortable seeing a P/S as high as Bubs Australia's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 59% gain to the company's top line. The latest three year period has also seen an excellent 69% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 21% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially higher than the 5.9% per year growth forecast for the broader industry.

With this information, we can see why Bubs Australia is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Bubs Australia maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Food industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you settle on your opinion, we've discovered 2 warning signs for Bubs Australia that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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

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.