Herfy Food Services Company (TADAWUL:6002) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Herfy Food Services Company (TADAWUL:6002) shares have had a really impressive month, gaining 28% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Herfy Food Services' price-to-sales (or "P/S") ratio of 1.5x right now seems quite "middle-of-the-road" compared to the Hospitality industry in Saudi Arabia, where the median P/S ratio is around 2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for Herfy Food Services

What Does Herfy Food Services' P/S Mean For Shareholders?

Herfy Food Services hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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How Is Herfy Food Services' Revenue Growth Trending?

In order to justify its P/S ratio, Herfy Food Services would need to produce growth that's similar to the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 4.2%. This means it has also seen a slide in revenue over the longer-term as revenue is down 15% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 5.7% per year as estimated by the five analysts watching the company. With the industry predicted to deliver 12% growth per annum, the company is positioned for a weaker revenue result.

With this information, we find it interesting that Herfy Food Services is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Final Word

Its shares have lifted substantially and now Herfy Food Services' P/S is back within range of the industry median. 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.

Given that Herfy Food Services' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

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If you're unsure about the strength of Herfy Food Services' 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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