There's Reason For Concern Over ICICI Prudential Life Insurance Company Limited's (NSE:ICICIPRULI) Price

There wouldn't be many who think ICICI Prudential Life Insurance Company Limited's (NSE:ICICIPRULI) price-to-sales (or "P/S") ratio of 1x is worth a mention when the median P/S for the Insurance industry in India is similar at about 1.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

See our latest analysis for ICICI Prudential Life Insurance

What Does ICICI Prudential Life Insurance's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, ICICI Prudential Life Insurance has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. 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 not quite in favour.

Want the full picture on analyst estimates for the company? Then our free report on ICICI Prudential Life Insurance will help you uncover what's on the horizon.

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like ICICI Prudential Life Insurance's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company grew revenue by an impressive 44% last year. Revenue has also lifted 14% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Turning to the outlook, the next year should bring diminished returns, with revenue decreasing 40% as estimated by the four analysts watching the company. With the industry predicted to deliver 3.9% growth, that's a disappointing outcome.

With this information, we find it concerning that ICICI Prudential Life Insurance is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. Only the boldest would assume these prices are sustainable as these declining revenues are likely to weigh on the share price eventually.

The Bottom Line On ICICI Prudential Life Insurance's P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

It appears that ICICI Prudential Life Insurance currently trades on a higher than expected P/S for a company whose revenues are forecast to decline. When we see a gloomy outlook like this, our immediate thoughts are that the share price is at risk of declining, negatively impacting P/S. If the declining revenues were to materialize in the form of a declining share price, shareholders will be feeling the pinch.

Before you settle on your opinion, we've discovered 2 warning signs for ICICI Prudential Life Insurance (1 is a bit concerning!) that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.