Potential Upside For FAT Brands Inc. (NASDAQ:FAT) Not Without Risk

FAT Brands Inc.'s (NASDAQ:FAT) price-to-sales (or "P/S") ratio of 0.3x may look like a pretty appealing investment opportunity when you consider close to half the companies in the Hospitality industry in the United States have P/S ratios greater than 1.3x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for FAT Brands

How FAT Brands Has Been Performing

With revenue growth that's inferior to most other companies of late, FAT Brands has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

How Is FAT Brands' Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. The latest three year period has seen an incredible overall rise in revenue, even though the last 12 month performance was only fair. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 39% during the coming year according to the two analysts following the company. With the industry only predicted to deliver 17%, the company is positioned for a stronger revenue result.

With this information, we find it odd that FAT Brands is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

What Does FAT Brands' P/S Mean For Investors?

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

A look at FAT Brands' revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

It is also worth noting that we have found 3 warning signs for FAT Brands (2 shouldn't be ignored!) that you need to take into consideration.

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).

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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.