Unpleasant Surprises Could Be In Store For Mitchells & Butlers plc's (LON:MAB) Shares

With a median price-to-sales (or "P/S") ratio of close to 0.9x in the Hospitality industry in the United Kingdom, you could be forgiven for feeling indifferent about Mitchells & Butlers plc's (LON:MAB) P/S ratio of 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Mitchells & Butlers

What Does Mitchells & Butlers' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Mitchells & Butlers has been relatively sluggish. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Mitchells & Butlers.

How Is Mitchells & Butlers' Revenue Growth Trending?

Mitchells & Butlers' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a decent 4.4% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 145% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 3.4% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 6.5% per annum, which is noticeably more attractive.

With this information, we find it interesting that Mitchells & Butlers 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. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

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.

When you consider that Mitchells & Butlers' 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. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

Plus, you should also learn about this 1 warning sign we've spotted with Mitchells & Butlers.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.