Improved Revenues Required Before Butterfly Gandhimathi Appliances Limited (NSE:BUTTERFLY) Stock's 28% Jump Looks Justified

Butterfly Gandhimathi Appliances Limited (NSE:BUTTERFLY) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

In spite of the firm bounce in price, when close to half the companies operating in India's Consumer Durables industry have price-to-sales ratios (or "P/S") above 2.2x, you may still consider Butterfly Gandhimathi Appliances as an enticing stock to check out with its 1.6x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Our free stock report includes 2 warning signs investors should be aware of before investing in Butterfly Gandhimathi Appliances. Read for free now.

View our latest analysis for Butterfly Gandhimathi Appliances

How Butterfly Gandhimathi Appliances Has Been Performing

For example, consider that Butterfly Gandhimathi Appliances' financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. 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 out of favour.

Although there are no analyst estimates available for Butterfly Gandhimathi Appliances, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Butterfly Gandhimathi Appliances?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Butterfly Gandhimathi Appliances' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. As a result, revenue from three years ago have also fallen 17% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 33% shows it's an unpleasant look.

In light of this, it's understandable that Butterfly Gandhimathi Appliances' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Key Takeaway

The latest share price surge wasn't enough to lift Butterfly Gandhimathi Appliances' P/S close to the industry median. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It's no surprise that Butterfly Gandhimathi Appliances maintains its low P/S off the back of its sliding revenue over the medium-term. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Butterfly Gandhimathi Appliances (1 shouldn't be ignored!) that you should be aware of before investing here.

If you're unsure about the strength of Butterfly Gandhimathi Appliances' 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.