Getting In Cheap On The Bombay Dyeing and Manufacturing Company Limited (NSE:BOMDYEING) Is Unlikely

When close to half the companies in the Luxury industry in India have price-to-sales ratios (or "P/S") below 0.8x, you may consider The Bombay Dyeing and Manufacturing Company Limited (NSE:BOMDYEING) as a stock to potentially avoid with its 1.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Bombay Dyeing and Manufacturing

What Does Bombay Dyeing and Manufacturing's P/S Mean For Shareholders?

For example, consider that Bombay Dyeing and Manufacturing's financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Bombay Dyeing and Manufacturing?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Bombay Dyeing and Manufacturing's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 18%. This means it has also seen a slide in revenue over the longer-term as revenue is down 14% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 84% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this information, we find it concerning that Bombay Dyeing and Manufacturing is trading at a P/S higher than the industry. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

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 Bombay Dyeing and Manufacturing currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Bombay Dyeing and Manufacturing that you should be aware of.

If these risks are making you reconsider your opinion on Bombay Dyeing and Manufacturing, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.