Spencer's Retail Limited (NSE:SPENCERS) Shares Fly 74% But Investors Aren't Buying For Growth

Spencer's Retail Limited (NSE:SPENCERS) shareholders have had their patience rewarded with a 74% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 64% in the last year.

Although its price has surged higher, Spencer's Retail's price-to-sales (or "P/S") ratio of 0.5x might still make it look like a buy right now compared to the Consumer Retailing industry in India, where around half of the companies have P/S ratios above 1x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Spencer's Retail

How Spencer's Retail Has Been Performing

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. Those who are bullish on Spencer's Retail will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Spencer's Retail will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

Spencer's Retail's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.5%. As a result, revenue from three years ago have also fallen 7.1% overall. 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.

In light of this, it's understandable that Spencer's Retail's P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

What Does Spencer's Retail's P/S Mean For Investors?

The latest share price surge wasn't enough to lift Spencer's Retail's P/S close to the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Before you settle on your opinion, we've discovered 4 warning signs for Spencer's Retail that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.