Avenue Supermarts Limited's (NSE:DMART) P/S Is On The Mark

When you see that almost half of the companies in the Consumer Retailing industry in India have price-to-sales ratios (or "P/S") below 1.2x, Avenue Supermarts Limited (NSE:DMART) looks to be giving off strong sell signals with its 4.5x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Avenue Supermarts

What Does Avenue Supermarts' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Avenue Supermarts has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Avenue Supermarts.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as steep as Avenue Supermarts' is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that the company grew revenue by an impressive 17% last year. The latest three year period has also seen an excellent 92% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 18% per annum over the next three years. That's shaping up to be materially higher than the 8.0% each year growth forecast for the broader industry.

With this information, we can see why Avenue Supermarts is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Avenue Supermarts' P/S

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've established that Avenue Supermarts maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Consumer Retailing industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

The company's balance sheet is another key area for risk analysis. Take a look at our free balance sheet analysis for Avenue Supermarts with six simple checks on some of these key factors.

If you're unsure about the strength of Avenue Supermarts' 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.