Spencer's Retail Limited's (NSE:SPENCERS) Shares Bounce 26% But Its Business Still Trails The Industry

Spencer's Retail Limited (NSE:SPENCERS) shares have continued their recent momentum with a 26% gain in the last month alone. The annual gain comes to 104% following the latest surge, making investors sit up and take notice.

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 0.5x, considering almost half of all companies in the Consumer Retailing industry in India have P/S ratios greater than 1x and even P/S higher than 5x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View 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. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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.

How Is Spencer's Retail's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Spencer's Retail's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. As a result, revenue from three years ago have also fallen 7.1% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

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. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Spencer's Retail's P/S?

Despite Spencer's Retail's share price climbing recently, its P/S still lags most other companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's no surprise that Spencer's Retail maintains its low P/S off the back of its sliding revenue over the medium-term. 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.

There are also other vital risk factors to consider before investing and we've discovered 4 warning signs for Spencer's Retail that you should be aware of.

If these risks are making you reconsider your opinion on Spencer's Retail, 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.