There's Reason For Concern Over Chapel Down Group Plc's (LON:CDGP) Price

When close to half the companies in the Beverage industry in the United Kingdom have price-to-sales ratios (or "P/S") below 1.7x, you may consider Chapel Down Group Plc (LON:CDGP) as a stock to avoid entirely with its 5.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Chapel Down Group

How Chapel Down Group Has Been Performing

Chapel Down Group certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Chapel Down Group's Revenue Growth Trending?

Chapel Down Group's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The latest three year period has also seen an excellent 119% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to slump, contracting by 1.0% during the coming year according to the one analyst following the company. With the rest of the industry predicted to shrink by 0.8%, it's set to post a similar result.

In light of this, it's somewhat peculiar that Chapel Down Group's P/S sits above the majority of other companies. We think shrinking revenues are unlikely to make the P/S premium sustainable, which could set up shareholders for future disappointment. Maintaining these prices will be difficult to achieve as the weak outlook is likely to weigh down the shares eventually.

The Bottom Line On Chapel Down Group'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've established that Chapel Down Group currently trades on a higher than expected P/S since its revenue forecast is in line with the struggling industry. At present, we are uneasy about the elevated P/S ratio, as the anticipated future revenues aren't likely to sustain such optimistic sentiment for the long-term. We're also cautious about the company's ability to resist further pain to its business from the broader industry turmoil. A positive change to revenues is needed in order to justify the current price-to-sales ratio.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Chapel Down Group you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.