Improved Revenues Required Before Guararapes Confecções S.A. (BVMF:GUAR3) Stock's 25% Jump Looks Justified

Guararapes Confecções S.A. (BVMF:GUAR3) shares have had a really impressive month, gaining 25% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 54%.

In spite of the firm bounce in price, considering around half the companies operating in Brazil's Luxury industry have price-to-sales ratios (or "P/S") above 1x, you may still consider Guararapes Confecções as an solid investment opportunity with its 0.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Guararapes Confecções

What Does Guararapes Confecções' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Guararapes Confecções has been relatively sluggish. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

Want the full picture on analyst estimates for the company? Then our free report on Guararapes Confecções will help you uncover what's on the horizon.

How Is Guararapes Confecções' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Guararapes Confecções' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a decent 3.6% gain to the company's revenues. Pleasingly, revenue has also lifted 34% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 5.9% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 12% each year, which is noticeably more attractive.

With this in consideration, its clear as to why Guararapes Confecções' P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift Guararapes Confecções' P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Guararapes Confecções' analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

It is also worth noting that we have found 1 warning sign for Guararapes Confecções that you need to take into consideration.

If these risks are making you reconsider your opinion on Guararapes Confecções, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.