The Good Drinks Australia Limited (ASX:GDA) share price has done very well over the last month, posting an excellent gain of 33%. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 15% in the last twelve months.

In spite of the firm bounce in price, there still wouldn’t be many who think Good Drinks Australia’s price-to-sales (or “P/S”) ratio of 0.4x is worth a mention when the median P/S in Australia’s Beverage industry is similar at about 0.5x. 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.

View our latest analysis for Good Drinks Australia

What Does Good Drinks Australia’s P/S Mean For Shareholders?

Good Drinks Australia could be doing better as it’s been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to strengthen positively, which has kept the P/S ratio from falling. However, if this isn’t the case, investors might get caught out paying too much for the stock.

If you’d like to see what analysts are forecasting going forward, you should check out our free report on Good Drinks Australia.

How Is Good Drinks Australia’s Revenue Growth Trending?

Good Drinks Australia’s P/S ratio would be typical for a company that’s only expected to deliver moderate growth, and importantly, perform in line with the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 2.8% last year. This was backed up an excellent period prior to see revenue up by 106% in total over the last three years. Therefore, it’s fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the one analyst covering the company suggest revenue should grow by 5.7% over the next year. Meanwhile, the rest of the industry is forecast to expand by 9.7%, which is noticeably more attractive.

With this in mind, we find it intriguing that Good Drinks Australia’s P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. 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 Final Word

Good Drinks Australia’s stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. It’s argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given that Good Drinks Australia’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. 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. This places shareholders’ investments at risk and potential investors in danger of paying an unnecessary premium.

And what about other risks? Every company has them, and we’ve spotted 1 warning sign for Good Drinks Australia you should know about.

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

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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.