Take Care Before Diving Into The Deep End On Swiss Water Decaffeinated Coffee Inc. (TSE:SWP)

Swiss Water Decaffeinated Coffee Inc.'s (TSE:SWP) price-to-sales (or "P/S") ratio of 0.2x might make it look like a buy right now compared to the Food industry in Canada, where around half of the companies have P/S ratios above 0.9x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Swiss Water Decaffeinated Coffee

How Swiss Water Decaffeinated Coffee Has Been Performing

For instance, Swiss Water Decaffeinated Coffee's receding revenue in recent times would have to be some food for thought. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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 out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Swiss Water Decaffeinated Coffee will help you shine a light on its historical performance.

How Is Swiss Water Decaffeinated Coffee's Revenue Growth Trending?

Swiss Water Decaffeinated Coffee's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 6.0%. Even so, admirably revenue has lifted 70% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 3.4% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Swiss Water Decaffeinated Coffee's P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Swiss Water Decaffeinated Coffee's P/S?

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're very surprised to see Swiss Water Decaffeinated Coffee currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

You need to take note of risks, for example - Swiss Water Decaffeinated Coffee has 3 warning signs (and 2 which are significant) we think you should know about.

If you're unsure about the strength of Swiss Water Decaffeinated Coffee'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.