It's not a stretch to say that Bega Cheese Limited's (ASX:BGA) price-to-sales (or "P/S") ratio of 0.4x right now seems quite "middle-of-the-road" for companies in the Food industry in Australia, where the median P/S ratio is around 0.6x. 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.

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View our latest analysis for Bega Cheese

How Has Bega Cheese Performed Recently?

Bega Cheese 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.

Keen to find out how analysts think Bega Cheese'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 Bega Cheese?

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

Retrospectively, the last year delivered a decent 4.2% gain to the company's revenues. The solid recent performance means it was also able to grow revenue by 24% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 3.4% per annum as estimated by the ten analysts watching the company. That's shaping up to be materially lower than the 7.1% per year growth forecast for the broader industry.

In light of this, it's curious that Bega Cheese's 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. 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

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.

When you consider that Bega Cheese's 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. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

You should always think about risks. Case in point, we've spotted 1 warning sign for Bega Cheese you should be aware of.

If you're unsure about the strength of Bega Cheese's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.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.