Sow Good Inc. (NASDAQ:SOWG) Stocks Pounded By 25% But Not Lagging Industry On Growth Or Pricing

Sow Good Inc. (NASDAQ:SOWG) shares have had a horrible month, losing 25% after a relatively good period beforehand. The good news is that in the last year, the stock has shone bright like a diamond, gaining 129%.

Even after such a large drop in price, given around half the companies in the United States' Food industry have price-to-sales ratios (or "P/S") below 1x, you may still consider Sow Good as a stock to avoid entirely with its 3.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Sow Good

What Does Sow Good's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Sow Good has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Sow Good would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 78% as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 2.8%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Sow Good's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Sow Good's shares may have suffered, but its P/S remains high. 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.

We've established that Sow Good maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Food industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

There are also other vital risk factors to consider before investing and we've discovered 3 warning signs for Sow Good that you should be aware of.

If you're unsure about the strength of Sow Good'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.