What You Can Learn From Godrej Consumer Products Limited's (NSE:GODREJCP) P/S

With a price-to-sales (or "P/S") ratio of 7.7x Godrej Consumer Products Limited (NSE:GODREJCP) may be sending very bearish signals at the moment, given that almost half of all the Personal Products companies in India have P/S ratios under 3.8x and even P/S lower than 1.1x are not unusual. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Godrej Consumer Products

What Does Godrej Consumer Products' P/S Mean For Shareholders?

There hasn't been much to differentiate Godrej Consumer Products' and the industry's revenue growth lately. It might be that many expect the mediocre revenue performance to strengthen positively, which has kept the P/S ratio from falling. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Godrej Consumer Products' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Godrej Consumer Products' to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 5.8% last year. The solid recent performance means it was also able to grow revenue by 17% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Turning to the outlook, the next year should generate growth of 10% as estimated by the analysts watching the company. That's shaping up to be materially higher than the 7.1% growth forecast for the broader industry.

With this information, we can see why Godrej Consumer Products is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Godrej Consumer Products' P/S?

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.

As we suspected, our examination of Godrej Consumer Products' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Godrej Consumer Products 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.