Tasty plc (LON:TAST) Shares Fly 26% But Investors Aren't Buying For Growth

Explore Tasty's Fair Values from the Community and select yours

Those holding Tasty plc (LON:TAST) shares would be relieved that the share price has rebounded 26% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. But the last month did very little to improve the 57% share price decline over the last year.

Although its price has surged higher, it would still be understandable if you think Tasty is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.3x, considering almost half the companies in the United Kingdom's Hospitality industry have P/S ratios above 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Tasty

What Does Tasty's Recent Performance Look Like?

Tasty hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

How Is Tasty's Revenue Growth Trending?

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

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 22%. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 2.6% per year over the next three years. With the industry predicted to deliver 6.4% growth each year, that's a disappointing outcome.

In light of this, it's understandable that Tasty's P/S would sit below the majority of other companies. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On Tasty's P/S

Tasty's stock price has surged recently, but its but its P/S still remains modest. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Tasty's analyst forecasts revealed that its outlook for shrinking revenue is contributing to its low P/S. As other companies in the industry are forecasting revenue growth, Tasty's poor outlook justifies its low P/S ratio. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Tasty (at least 2 which make us uncomfortable), and understanding them should be part of your investment process.

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).

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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.