Shareholders Should Be Pleased With Avenue Supermarts Limited's (NSE:DMART) Price

Explore Avenue Supermarts's Fair Values from the Community and select yours

When close to half the companies in the Consumer Retailing industry in India have price-to-sales ratios (or "P/S") below 1x, you may consider Avenue Supermarts Limited (NSE:DMART) as a stock to avoid entirely with its 5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Avenue Supermarts

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

Avenue Supermarts' revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Avenue Supermarts' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Avenue Supermarts' Revenue Growth Trending?

Avenue Supermarts' 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.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. Pleasingly, revenue has also lifted 72% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 19% as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 9.9%, which is noticeably less attractive.

With this in mind, it's not hard to understand why Avenue Supermarts' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

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

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.

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. Unless these conditions change, they will continue to provide strong support to the share price.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Avenue Supermarts with six simple checks will allow you to discover any risks that could be an issue.

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.

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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.