Stock Analysis

Fevertree Drinks PLC (LON:FEVR) Not Lagging Industry On Growth Or Pricing

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Fevertree Drinks PLC's (LON:FEVR) price-to-sales (or "P/S") ratio of 3.3x may not look like an appealing investment opportunity when you consider close to half the companies in the Beverage industry in the United Kingdom have P/S ratios below 1.6x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Fevertree Drinks

AIM:FEVR Price to Sales Ratio vs Industry February 14th 2024

What Does Fevertree Drinks' P/S Mean For Shareholders?

Recent revenue growth for Fevertree Drinks has been in line with the industry. It might be that many expect the mediocre 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 Fevertree Drinks.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Fevertree Drinks would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 8.7%. This was backed up an excellent period prior to see revenue up by 45% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 7.4% each year as estimated by the analysts watching the company. That's shaping up to be materially higher than the 2.9% each year growth forecast for the broader industry.

In light of this, it's understandable that Fevertree Drinks' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our look into Fevertree Drinks shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

Having said that, be aware Fevertree Drinks is showing 1 warning sign in our investment analysis, you should know about.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Fevertree Drinks is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.