Subdued Growth No Barrier To Century Textiles and Industries Limited (NSE:CENTURYTEX) With Shares Advancing 26%

The Century Textiles and Industries Limited (NSE:CENTURYTEX) share price has done very well over the last month, posting an excellent gain of 26%. The last month tops off a massive increase of 161% in the last year.

After such a large jump in price, you could be forgiven for thinking Century Textiles and Industries is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.5x, considering almost half the companies in India's Forestry industry have P/S ratios below 0.9x. 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 Century Textiles and Industries

How Has Century Textiles and Industries Performed Recently?

There hasn't been much to differentiate Century Textiles and Industries' and the industry's revenue growth lately. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. 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 Century Textiles and Industries.

Is There Enough Revenue Growth Forecasted For Century Textiles and Industries?

The only time you'd be truly comfortable seeing a P/S as steep as Century Textiles and Industries' is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Still, the latest three year period has seen an excellent 56% overall rise in revenue, in spite of its uninspiring short-term performance. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Looking ahead now, revenue is anticipated to climb by 4.2% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 9.5%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Century Textiles and Industries' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What We Can Learn From Century Textiles and Industries' P/S?

The strong share price surge has lead to Century Textiles and Industries' P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Century Textiles and Industries, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Having said that, be aware Century Textiles and Industries is showing 1 warning sign in our investment analysis, you should know about.

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.

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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.