Pinning Down Shake Shack Inc.'s (NYSE:SHAK) P/S Is Difficult Right Now

When close to half the companies in the Hospitality industry in the United States have price-to-sales ratios (or "P/S") below 1.7x, you may consider Shake Shack Inc. (NYSE:SHAK) as a stock to avoid entirely with its 4.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Shake Shack

How Has Shake Shack Performed Recently?

With revenue growth that's inferior to most other companies of late, Shake Shack has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

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

Retrospectively, the last year delivered an exceptional 17% gain to the company's top line. Pleasingly, revenue has also lifted 74% in aggregate from three years ago, thanks to the last 12 months of growth. 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 14% per year as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 12% per year, which is not materially different.

With this in consideration, we find it intriguing that Shake Shack's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

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.

Analysts are forecasting Shake Shack's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Having said that, be aware Shake Shack is showing 1 warning sign in our investment analysis, you should know about.

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.