Potbelly Corporation's (NASDAQ:PBPB) Price Is Right But Growth Is Lacking After Shares Rocket 28%

The Potbelly Corporation (NASDAQ:PBPB) share price has done very well over the last month, posting an excellent gain of 28%. Unfortunately, despite the strong performance over the last month, the full year gain of 6.1% isn't as attractive.

In spite of the firm bounce in price, Potbelly may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.6x, considering almost half of all companies in the Hospitality industry in the United States have P/S ratios greater than 1.6x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Potbelly

What Does Potbelly's Recent Performance Look Like?

Potbelly 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. The P/S ratio is probably low because investors think this poor 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.

Want the full picture on analyst estimates for the company? Then our free report on Potbelly will help you uncover what's on the horizon.

How Is Potbelly's Revenue Growth Trending?

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

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 3.0%. Even so, admirably revenue has lifted 34% in aggregate from three years ago, notwithstanding the last 12 months. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Looking ahead now, revenue is anticipated to climb by 0.5% during the coming year according to the four analysts following the company. That's shaping up to be materially lower than the 13% growth forecast for the broader industry.

With this information, we can see why Potbelly 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 Key Takeaway

Despite Potbelly's share price climbing recently, its P/S still lags most other companies. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As expected, our analysis of Potbelly's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. 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 2 warning signs with Potbelly, and understanding these should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.