Getting In Cheap On Inghams Group Limited (ASX:ING) Is Unlikely

With a median price-to-sales (or "P/S") ratio of close to 0.7x in the Food industry in Australia, you could be forgiven for feeling indifferent about Inghams Group Limited's (ASX:ING) P/S ratio of 0.4x. 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 Inghams Group

How Has Inghams Group Performed Recently?

With revenue growth that's superior to most other companies of late, Inghams Group has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like Inghams Group's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 21% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 3.7% per year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 5.8% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Inghams Group is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

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.

When you consider that Inghams Group's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be 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. A positive change is needed in order to justify the current price-to-sales ratio.

Before you settle on your opinion, we've discovered 2 warning signs for Inghams Group (1 shouldn't be ignored!) that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.