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There wouldn't be many who think Virgin Wines UK PLC's (LON:VINO) price-to-sales (or "P/S") ratio of 0.3x is worth a mention when the median P/S for the Consumer Retailing industry in the United Kingdom is very similar. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.
See our latest analysis for Virgin Wines UK
How Virgin Wines UK Has Been Performing
Virgin Wines UK hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.
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Is There Some Revenue Growth Forecasted For Virgin Wines UK?
There's an inherent assumption that a company should be matching the industry for P/S ratios like Virgin Wines UK's to be considered reasonable.
Retrospectively, the last year delivered a frustrating 16% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 9.9% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.
Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 0.7% over the next year. Meanwhile, the rest of the industry is forecast to expand by 5.4%, which is noticeably more attractive.
With this information, we find it interesting that Virgin Wines UK is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.
The Key Takeaway
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.
Our look at the analysts forecasts of Virgin Wines UK's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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.