It's A Story Of Risk Vs Reward With C&A Modas S.A. (BVMF:CEAB3)

It's not a stretch to say that C&A Modas S.A.'s (BVMF:CEAB3) price-to-sales (or "P/S") ratio of 0.4x seems quite "middle-of-the-road" for Specialty Retail companies in Brazil, seeing as it matches the P/S ratio of the wider industry. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for C&A Modas

How Has C&A Modas Performed Recently?

With its revenue growth in positive territory compared to the declining revenue of most other companies, C&A Modas has been doing quite well of late. Perhaps the market is expecting its current strong performance to taper off in accordance to the rest of the industry, which has kept the P/S contained. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on C&A Modas.

Is There Some Revenue Growth Forecasted For C&A Modas?

The only time you'd be comfortable seeing a P/S like C&A Modas' is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.6% last year. The latest three year period has also seen an excellent 56% overall rise in revenue, aided somewhat by its short-term performance. 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 10.0% per annum as estimated by the six analysts watching the company. That's shaping up to be materially higher than the 5.5% each year growth forecast for the broader industry.

In light of this, it's curious that C&A Modas' P/S sits in line with the majority of other companies. It may be that most investors aren't convinced the company can achieve future growth expectations.

The Final Word

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 established that C&A Modas currently trades on a lower than expected P/S since its forecasted revenue growth is higher than the wider industry. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. This uncertainty seems to be reflected in the share price which, while stable, could be higher given the revenue forecasts.

It is also worth noting that we have found 1 warning sign for C&A Modas that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.