What City Chic Collective Limited's (ASX:CCX) 33% Share Price Gain Is Not Telling You

City Chic Collective Limited (ASX:CCX) shareholders would be excited to see that the share price has had a great month, posting a 33% gain and recovering from prior weakness. Looking further back, the 11% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about City Chic Collective's P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Specialty Retail industry in Australia is also close to 0.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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Check out our latest analysis for City Chic Collective

How City Chic Collective Has Been Performing

Recent times haven't been great for City Chic Collective as its revenue has been rising slower than most other companies. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on City Chic Collective.

Is There Some Revenue Growth Forecasted For City Chic Collective?

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 58% drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 7.3% per year over the next three years. With the industry predicted to deliver 11% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it interesting that City Chic Collective is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. 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

City Chic Collective appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in 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.

Our look at the analysts forecasts of City Chic Collective's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. 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. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Plus, you should also learn about these 2 warning signs we've spotted with City Chic Collective.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.