Pick n Pay Stores Limited (JSE:PIK) Soars 25% But It's A Story Of Risk Vs Reward

Pick n Pay Stores Limited (JSE:PIK) shares have had a really impressive month, gaining 25% after a shaky period beforehand. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 2.5% in the last twelve months.

Although its price has surged higher, given about half the companies operating in South Africa's Consumer Retailing industry have price-to-sales ratios (or "P/S") above 0.7x, you may still consider Pick n Pay Stores as an attractive investment with its 0.1x 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 limited.

Check out our latest analysis for Pick n Pay Stores

What Does Pick n Pay Stores' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Pick n Pay Stores has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Pick n Pay Stores.

Is There Any Revenue Growth Forecasted For Pick n Pay Stores?

The only time you'd be truly comfortable seeing a P/S as low as Pick n Pay Stores' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a decent 5.9% gain to the company's revenues. The latest three year period has also seen a 21% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 4.6% per annum during the coming three years according to the five analysts following the company. With the industry predicted to deliver 5.6% growth each year, the company is positioned for a comparable revenue result.

In light of this, it's peculiar that Pick n Pay Stores' P/S sits below the majority of other companies. It may be that most investors are not convinced the company can achieve future growth expectations.

The Key Takeaway

The latest share price surge wasn't enough to lift Pick n Pay Stores' P/S close to the industry median. 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.

It looks to us like the P/S figures for Pick n Pay Stores remain low despite growth that is expected to be in line with other companies in the industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. It appears some are indeed anticipating revenue instability, because these conditions should normally provide more support to the share price.

Before you settle on your opinion, we've discovered 1 warning sign for Pick n Pay Stores that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.