Getting In Cheap On PGG Wrightson Limited (NZSE:PGW) Is Unlikely

There wouldn't be many who think PGG Wrightson Limited's (NZSE:PGW) price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S for the Food industry in New Zealand is similar at about 0.6x. 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 PGG Wrightson

What Does PGG Wrightson's P/S Mean For Shareholders?

For example, consider that PGG Wrightson's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for PGG Wrightson, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For PGG Wrightson?

The only time you'd be comfortable seeing a P/S like PGG Wrightson's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 6.1% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.0% overall rise in revenue. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 6.7% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that PGG Wrightson's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

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 PGG Wrightson revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

And what about other risks? Every company has them, and we've spotted 2 warning signs for PGG Wrightson you should know about.

If you're unsure about the strength of PGG Wrightson's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.