abc S.A.'s (SNSE:ABC) Shares Climb 26% But Its Business Is Yet to Catch Up

abc S.A. (SNSE:ABC) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about abc's P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the Multiline Retail industry in Chile is also close to 0.3x. 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 abc

What Does abc's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, abc has been doing very well. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on abc will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For abc?

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

If we review the last year of revenue growth, the company posted a terrific increase of 45%. The latest three year period has also seen a 6.1% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it intriguing that abc's P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

abc's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of abc revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for abc (2 are significant) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.