Vardhman Polytex Limited's (NSE:VARDMNPOLY) Share Price Boosted 25% But Its Business Prospects Need A Lift Too

Vardhman Polytex Limited (NSE:VARDMNPOLY) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 285% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, Vardhman Polytex's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Luxury industry in India, where around half of the companies have P/S ratios above 0.9x and even P/S above 3x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Vardhman Polytex

How Vardhman Polytex Has Been Performing

As an illustration, revenue has deteriorated at Vardhman Polytex over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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.

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.

How Is Vardhman Polytex's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 42% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 22% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

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

With this in consideration, it's easy to understand why Vardhman Polytex's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Key Takeaway

Despite Vardhman Polytex's share price climbing recently, its P/S still lags most other companies. 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.

Our examination of Vardhman Polytex confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Having said that, be aware Vardhman Polytex is showing 6 warning signs in our investment analysis, and 2 of those don't sit too well with us.

If you're unsure about the strength of Vardhman Polytex'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.