Investor Optimism Abounds Glenmark Pharmaceuticals Limited (NSE:GLENMARK) But Growth Is Lacking

When close to half the companies in the Pharmaceuticals industry in India have price-to-sales ratios (or "P/S") below 2.6x, you may consider Glenmark Pharmaceuticals Limited (NSE:GLENMARK) as a stock to potentially avoid with its 3.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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Check out our latest analysis for Glenmark Pharmaceuticals

What Does Glenmark Pharmaceuticals' Recent Performance Look Like?

Recent times haven't been great for Glenmark Pharmaceuticals as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Glenmark Pharmaceuticals will help you uncover what's on the horizon.

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

Glenmark Pharmaceuticals' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 6.2%. Revenue has also lifted 9.2% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Shifting to the future, estimates from the nine analysts covering the company suggest revenue should grow by 11% per year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 12% per year, which is not materially different.

With this in consideration, we find it intriguing that Glenmark Pharmaceuticals' P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does Glenmark Pharmaceuticals' P/S Mean For Investors?

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.

Given Glenmark Pharmaceuticals' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 1 warning sign for Glenmark Pharmaceuticals that we have uncovered.

If you're unsure about the strength of Glenmark Pharmaceuticals' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.