Vardhman Polytex Limited's (NSE:VARDMNPOLY) 26% Share Price Plunge Could Signal Some Risk

Vardhman Polytex Limited (NSE:VARDMNPOLY) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. Looking back over the past twelve months the stock has been a solid performer regardless, with a gain of 13%.

In spite of the heavy fall in price, given close to half the companies operating in India's Luxury industry have price-to-sales ratios (or "P/S") below 0.9x, you may still consider Vardhman Polytex as a stock to potentially avoid with its 1.4x P/S ratio. 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 Vardhman Polytex

What Does Vardhman Polytex's Recent Performance Look Like?

For instance, Vardhman Polytex's receding revenue in recent times would have to be some food for thought. 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.

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 Vardhman Polytex's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Vardhman Polytex?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Vardhman Polytex's 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 38%. As a result, revenue from three years ago have also fallen 66% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 87% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Vardhman Polytex's P/S exceeds that of its industry peers. 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

Vardhman Polytex's P/S remain high even after its stock plunged. 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.

Our examination of Vardhman Polytex revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 5 warning signs we've spotted with Vardhman Polytex (including 3 which are concerning).

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.