Investors Holding Back On British American Tobacco p.l.c. (LON:BATS)

There wouldn't be many who think British American Tobacco p.l.c.'s (LON:BATS) price-to-sales (or "P/S") ratio of 2.3x is worth a mention when the median P/S for the Tobacco industry in the United Kingdom is similar at about 1.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for British American Tobacco

How Has British American Tobacco Performed Recently?

British American Tobacco's negative revenue growth of late has neither been better nor worse than most other companies. The P/S ratio is probably moderate because investors think the company's revenue trend will continue to follow the rest of the industry. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. In saying that, existing shareholders probably aren't too pessimistic about the share price if the company's revenue continues tracking the industry.

Keen to find out how analysts think British American Tobacco's future stacks up against the industry? In that case, our free report is a great place to start.

How Is British American Tobacco's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like British American Tobacco's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 7.2%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 2.1% per year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 0.02% each year growth forecast for the broader industry.

With this information, we find it interesting that British American Tobacco is trading at a fairly similar P/S compared to the industry. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Key Takeaway

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.

Despite enticing revenue growth figures that outpace the industry, British American Tobacco's P/S isn't quite what we'd expect. Perhaps uncertainty in the revenue forecasts are what's keeping the P/S ratio consistent with the rest of the industry. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

Before you take the next step, you should know about the 2 warning signs for British American Tobacco that we have uncovered.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.