Benign Growth For Krispy Kreme, Inc. (NASDAQ:DNUT) Underpins Stock's 33% Plummet

To the annoyance of some shareholders, Krispy Kreme, Inc. (NASDAQ:DNUT) shares are down a considerable 33% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 51% share price decline.

Even after such a large drop in price, Krispy Kreme's price-to-sales (or "P/S") ratio of 0.6x might still make it look like a buy right now compared to the Hospitality industry in the United States, where around half of the companies have P/S ratios above 1.6x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Krispy Kreme

How Has Krispy Kreme Performed Recently?

While the industry has experienced revenue growth lately, Krispy Kreme's revenue has gone into reverse gear, which is not great. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

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

Is There Any Revenue Growth Forecasted For Krispy Kreme?

In order to justify its P/S ratio, Krispy Kreme would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 1.2% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 20% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 5.7% each year as estimated by the eight analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 13% per year, which is noticeably more attractive.

In light of this, it's understandable that Krispy Kreme's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What Does Krispy Kreme's P/S Mean For Investors?

Krispy Kreme's recently weak share price has pulled its P/S back below other Hospitality companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Krispy Kreme maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. The company will need a change of fortune to justify the P/S rising higher in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 4 warning signs with Krispy Kreme (at least 3 which are concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Krispy Kreme, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.