Why We're Not Concerned Yet About Filatex Fashions Limited's (NSE:FILATFASH) 27% Share Price Plunge

Unfortunately for some shareholders, the Filatex Fashions Limited (NSE:FILATFASH) share price has dived 27% in the last thirty days, prolonging recent pain. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Even after such a large drop in price, you could still be forgiven for thinking Filatex Fashions is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.6x, considering almost half the companies in India's Luxury industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Filatex Fashions

What Does Filatex Fashions' P/S Mean For Shareholders?

Filatex Fashions has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Filatex Fashions' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Filatex Fashions' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Filatex Fashions' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Bottom Line On Filatex Fashions' P/S

A significant share price dive has done very little to deflate Filatex Fashions' very lofty P/S. 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.

It's no surprise that Filatex Fashions can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 3 warning signs for Filatex Fashions (2 are a bit concerning!) that you need to take into consideration.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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.