Optimistic Investors Push Zodiac Clothing Company Limited (NSE:ZODIACLOTH) Shares Up 42% But Growth Is Lacking

Zodiac Clothing Company Limited (NSE:ZODIACLOTH) shareholders have had their patience rewarded with a 42% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 62%.

Since its price has surged higher, you could be forgiven for thinking Zodiac Clothing is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.9x, considering almost half the companies in India's Luxury industry have P/S ratios below 1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Zodiac Clothing

What Does Zodiac Clothing's P/S Mean For Shareholders?

For example, consider that Zodiac Clothing's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. 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 Zodiac Clothing will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Zodiac Clothing?

In order to justify its P/S ratio, Zodiac Clothing would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a frustrating 17% decrease to the company's top line. Still, the latest three year period has seen an excellent 46% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's momentum is pretty similar based on recent medium-term annualised revenue results.

In light of this, it's curious that Zodiac Clothing's P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Zodiac Clothing's P/S

The large bounce in Zodiac Clothing's shares has lifted the company's P/S handsomely. 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.

We didn't expect to see Zodiac Clothing trade at such a high P/S considering its last three-year revenue growth has only been on par with the rest of the industry. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Zodiac Clothing that you should be aware of.

If these risks are making you reconsider your opinion on Zodiac Clothing, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com