Magazine Luiza S.A.'s (BVMF:MGLU3) 26% Dip Still Leaving Some Shareholders Feeling Restless Over Its P/SRatio

Magazine Luiza S.A. (BVMF:MGLU3) shares have had a horrible month, losing 26% after a relatively good period beforehand. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 52% loss during that time.

Even after such a large drop in price, there still wouldn't be many who think Magazine Luiza's price-to-sales (or "P/S") ratio of 0.2x is worth a mention when the median P/S in Brazil's Multiline Retail industry is similar at about 0.3x. 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.

View our latest analysis for Magazine Luiza

What Does Magazine Luiza's Recent Performance Look Like?

Magazine Luiza hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Magazine Luiza's Revenue Growth Trending?

In order to justify its P/S ratio, Magazine Luiza would need to produce growth that's similar to the industry.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Likewise, not much has changed from three years ago as revenue have been stuck during that whole time. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Looking ahead now, revenue is anticipated to climb by 8.2% during the coming year according to the nine analysts following the company. That's shaping up to be materially lower than the 12% growth forecast for the broader industry.

In light of this, it's curious that Magazine Luiza's P/S sits in line with the majority of other companies. 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.

What We Can Learn From Magazine Luiza's P/S?

Following Magazine Luiza's share price tumble, its P/S is just clinging on to the industry median P/S. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Given that Magazine Luiza'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. 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. A positive change is needed in order to justify the current price-to-sales ratio.

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

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.