Radico Khaitan Limited's (NSE:RADICO) Popularity With Investors Is Under Threat From Overpricing

When you see that almost half of the companies in the Beverage industry in India have price-to-sales ratios (or "P/S") below 3x, Radico Khaitan Limited (NSE:RADICO) looks to be giving off strong sell signals with its 7.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Radico Khaitan

What Does Radico Khaitan's Recent Performance Look Like?

Radico Khaitan certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Radico Khaitan?

In order to justify its P/S ratio, Radico Khaitan would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 28% last year. Pleasingly, revenue has also lifted 67% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 14% as estimated by the eleven analysts watching the company. That's shaping up to be materially lower than the 17% growth forecast for the broader industry.

With this information, we find it concerning that Radico Khaitan is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Radico Khaitan, this doesn't appear to be impacting the P/S in the slightest. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. At these price levels, investors should remain cautious, particularly if things don't improve.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Radico Khaitan with six simple checks.

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.