Revenues Not Telling The Story For Companhia Brasileira De Distribuicao (BVMF:PCAR3) After Shares Rise 29%

Companhia Brasileira De Distribuicao (BVMF:PCAR3) shareholders have had their patience rewarded with a 29% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 36%.

Although its price has surged higher, it's still not a stretch to say that Companhia Brasileira De Distribuicao's price-to-sales (or "P/S") ratio of 0.1x right now seems quite "middle-of-the-road" compared to the Consumer Retailing industry in Brazil, where the median P/S ratio is around 0.2x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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Check out our latest analysis for Companhia Brasileira De Distribuicao

How Companhia Brasileira De Distribuicao Has Been Performing

With revenue growth that's inferior to most other companies of late, Companhia Brasileira De Distribuicao has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

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Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Companhia Brasileira De Distribuicao would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 4.5%. The latest three year period has also seen an excellent 261% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 6.4% per annum during the coming three years according to the eight analysts following the company. That's shaping up to be materially lower than the 13% each year growth forecast for the broader industry.

With this in mind, we find it intriguing that Companhia Brasileira De Distribuicao's P/S is closely matching its industry peers. 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

Its shares have lifted substantially and now Companhia Brasileira De Distribuicao's P/S is back within range of the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Given that Companhia Brasileira De Distribuicao'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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Companhia Brasileira De Distribuicao that you need to be mindful of.

If you're unsure about the strength of Companhia Brasileira De Distribuicao'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.