Cambridge Nutritional Sciences plc's (LON:CNSL) Shares Lagging The Industry But So Is The Business

Cambridge Nutritional Sciences plc's (LON:CNSL) price-to-sales (or "P/S") ratio of 0.8x might make it look like a strong buy right now compared to the Medical Equipment industry in the United Kingdom, where around half of the companies have P/S ratios above 3.4x and even P/S above 9x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Cambridge Nutritional Sciences

How Has Cambridge Nutritional Sciences Performed Recently?

Cambridge Nutritional Sciences has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cambridge Nutritional Sciences will help you shine a light on its historical performance.

How Is Cambridge Nutritional Sciences' Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. Revenue has also lifted 6.2% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 8.3% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's understandable that Cambridge Nutritional Sciences' P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

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.

Our examination of Cambridge Nutritional Sciences confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 3 warning signs for Cambridge Nutritional Sciences (2 make us uncomfortable!) that we have uncovered.

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.