Advance Auto Parts, Inc.'s (NYSE:AAP) 27% Share Price Plunge Could Signal Some Risk

Unfortunately for some shareholders, the Advance Auto Parts, Inc. (NYSE:AAP) share price has dived 27% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 33% in that time.

In spite of the heavy fall in price, there still wouldn't be many who think Advance Auto Parts' price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in the United States' Specialty Retail industry is similar at about 0.4x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for Advance Auto Parts

How Has Advance Auto Parts Performed Recently?

Advance Auto Parts could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Advance Auto Parts.

Is There Some Revenue Growth Forecasted For Advance Auto Parts?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Advance Auto Parts' to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Likewise, not much has changed from three years ago as revenue have been stuck during that whole time. So it seems apparent to us that the company has struggled to grow revenue meaningfully over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 1.5% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 5.7% per year, which is noticeably more attractive.

In light of this, it's curious that Advance Auto Parts' P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

With its share price dropping off a cliff, the P/S for Advance Auto Parts looks to be in line with the rest of the Specialty Retail industry. 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.

When you consider that Advance Auto Parts' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Advance Auto Parts (1 is significant!) that you should be aware of before investing here.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.