Burberry Group plc's (LON:BRBY) Shares Climb 26% But Its Business Is Yet to Catch Up

Burberry Group plc (LON:BRBY) shares have continued their recent momentum with a 26% gain in the last month alone. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 7.5% over the last year.

After such a large jump in price, you could be forgiven for thinking Burberry Group is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.6x, considering almost half the companies in the United Kingdom's Luxury industry have P/S ratios below 0.7x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Burberry Group

How Burberry Group Has Been Performing

Burberry Group 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. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. 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 Burberry Group will help you uncover what's on the horizon.

How Is Burberry Group's Revenue Growth Trending?

In order to justify its P/S ratio, Burberry Group would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. Unfortunately, that's brought it right back to where it started three years ago with revenue growth being virtually non-existent overall during that time. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 1.7% per annum over the next three years. That's shaping up to be materially lower than the 8.2% per annum growth forecast for the broader industry.

With this in consideration, we believe it doesn't make sense that Burberry Group's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are 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 Burberry Group's P/S?

Burberry Group's P/S is on the rise since its shares have risen strongly. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Burberry Group, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Burberry Group you should know about.

If you're unsure about the strength of Burberry Group'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.