Spencer's Retail Limited (NSE:SPENCERS) Held Back By Insufficient Growth Even After Shares Climb 35%

Spencer's Retail Limited (NSE:SPENCERS) shareholders have had their patience rewarded with a 35% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 85% in the last year.

Although its price has surged higher, Spencer's Retail may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.4x, considering almost half of all companies in the Consumer Retailing industry in India have P/S ratios greater than 1.2x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Spencer's Retail

What Does Spencer's Retail's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Spencer's Retail over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction 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 Spencer's Retail's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Spencer's Retail's is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 3.3% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 4.5% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this in mind, we understand why Spencer's Retail's P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The latest share price surge wasn't enough to lift Spencer's Retail's P/S close to the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Spencer's Retail confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 2 warning signs for Spencer's Retail that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.