Veste S.A. Estilo's (BVMF:VSTE3) 38% Share Price Surge Not Quite Adding Up

Veste S.A. Estilo (BVMF:VSTE3) shares have had a really impressive month, gaining 38% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 36%.

Since its price has surged higher, you could be forgiven for thinking Veste Estilo is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in Brazil's Luxury industry have P/S ratios below 0.8x. 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.

View our latest analysis for Veste Estilo

What Does Veste Estilo's Recent Performance Look Like?

Veste Estilo could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very 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 Veste Estilo.

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

Veste Estilo's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 2.8%. This was backed up an excellent period prior to see revenue up by 72% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 12% each year as estimated by the lone analyst watching the company. That's shaping up to be similar to the 13% per year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Veste Estilo's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Veste Estilo's P/S

The large bounce in Veste Estilo'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.

Given Veste Estilo's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Veste Estilo (1 is a bit concerning!) that you need to be mindful of.

If these risks are making you reconsider your opinion on Veste Estilo, 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.