Toast, Inc. (NYSE:TOST) Might Not Be As Mispriced As It Looks

With a median price-to-sales (or "P/S") ratio of close to 2.1x in the Diversified Financial industry in the United States, you could be forgiven for feeling indifferent about Toast, Inc.'s (NYSE:TOST) P/S ratio, which comes in at about the same. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Toast

How Has Toast Performed Recently?

With revenue growth that's inferior to most other companies of late, Toast has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. 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 Toast's future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Toast?

The only time you'd be comfortable seeing a P/S like Toast's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 45% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue 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 23% each year as estimated by the analysts watching the company. With the industry only predicted to deliver 1.0% per annum, the company is positioned for a stronger revenue result.

In light of this, it's curious that Toast's P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Toast's P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite enticing revenue growth figures that outpace the industry, Toast's P/S isn't quite what we'd expect. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Toast, and understanding these should be part of your investment process.

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

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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.