Why We're Not Concerned About Wingstop Inc.'s (NASDAQ:WING) Share Price

When close to half the companies in the Hospitality industry in the United States have price-to-sales ratios (or "P/S") below 1.6x, you may consider Wingstop Inc. (NASDAQ:WING) as a stock to avoid entirely with its 15x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Wingstop

How Has Wingstop Performed Recently?

Recent times have been advantageous for Wingstop as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Wingstop's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Wingstop's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 35% last year. The latest three year period has also seen an excellent 116% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 21% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 13% each year, which is noticeably less attractive.

With this information, we can see why Wingstop is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Wingstop's P/S

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 Wingstop's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

You should always think about risks. Case in point, we've spotted 2 warning signs for Wingstop you should be aware of, and 1 of them shouldn't be ignored.

If you're unsure about the strength of Wingstop's 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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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.