Aditya Birla Fashion and Retail Limited (NSE:ABFRL) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, Aditya Birla Fashion and Retail Limited (NSE:ABFRL) shares have been powering on, with a gain of 28% in the last thirty days. The last 30 days bring the annual gain to a very sharp 63%.

Following the firm bounce in price, when almost half of the companies in India’s Specialty Retail industry have price-to-sales ratios (or “P/S”) below 1.6x, you may consider Aditya Birla Fashion and Retail as a stock probably not worth researching with its 2.3x 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 as high as it is.

Check out our latest analysis for Aditya Birla Fashion and Retail

How Has Aditya Birla Fashion and Retail Performed Recently?

Recent times haven’t been great for Aditya Birla Fashion and Retail as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Keen to find out how analysts think Aditya Birla Fashion and Retail’s future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you’d be truly comfortable seeing a P/S as high as Aditya Birla Fashion and Retail’s is when the company’s growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 13%. Pleasingly, revenue has also lifted 167% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 14% per annum during the coming three years according to the analysts following the company. That’s shaping up to be materially lower than the 26% per annum growth forecast for the broader industry.

With this information, we find it concerning that Aditya Birla Fashion and Retail is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company’s business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Bottom Line On Aditya Birla Fashion and Retail’s P/S

The large bounce in Aditya Birla Fashion and Retail’s shares has lifted the company’s P/S handsomely. 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.

We’ve concluded that Aditya Birla Fashion and Retail currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. The weakness in the company’s revenue estimate doesn’t bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn’t improve. This places shareholders’ investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Aditya Birla Fashion and Retail is showing 1 warning sign in our investment analysis, you should know about.

If you’re unsure about the strength of Aditya Birla Fashion and Retail’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.