Stock Analysis

Why Investors Shouldn't Be Surprised By Noodles & Company's (NASDAQ:NDLS) 28% Share Price Plunge

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To the annoyance of some shareholders, Noodles & Company (NASDAQ:NDLS) shares are down a considerable 28% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 61% loss during that time.

After such a large drop in price, given about half the companies operating in the United States' Hospitality industry have price-to-sales ratios (or "P/S") above 1.3x, you may consider Noodles as an attractive investment with its 0.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Noodles

NasdaqGS:NDLS Price to Sales Ratio vs Industry March 14th 2024

What Does Noodles' P/S Mean For Shareholders?

Noodles 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. Perhaps the P/S remains low as investors think the prospects of strong revenue growth aren't on the horizon. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Noodles.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 1.1%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 3.2% over the next year. With the industry predicted to deliver 13% growth, the company is positioned for a weaker revenue result.

With this information, we can see why Noodles is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Bottom Line On Noodles' P/S

Noodles' P/S has taken a dip along with its share price. 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.

As we suspected, our examination of Noodles' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. 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 is also worth noting that we have found 4 warning signs for Noodles (2 are a bit unpleasant!) that you need to take into consideration.

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

Valuation is complex, but we're helping make it simple.

Find out whether Noodles is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.