Unpleasant Surprises Could Be In Store For Petco Health and Wellness Company, Inc.'s (NASDAQ:WOOF) Shares

With a median price-to-sales (or "P/S") ratio of close to 0.5x in the Specialty Retail industry in the United States, you could be forgiven for feeling indifferent about Petco Health and Wellness Company, Inc.'s (NASDAQ:WOOF) P/S ratio of 0.1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for Petco Health and Wellness Company

How Petco Health and Wellness Company Has Been Performing

Petco Health and Wellness Company 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. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Petco Health and Wellness Company'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 Petco Health and Wellness Company?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Petco Health and Wellness Company's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.8% decrease to the company's top line. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Turning to the outlook, the next three years should generate growth of 0.7% per annum as estimated by the twelve analysts watching the company. That's shaping up to be materially lower than the 7.6% per annum growth forecast for the broader industry.

In light of this, it's curious that Petco Health and Wellness Company'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

While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given that Petco Health and Wellness Company's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. 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.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Petco Health and Wellness Company that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.