Unpleasant Surprises Could Be In Store For Glenmark Pharmaceuticals Limited's (NSE:GLENMARK) Shares

With a median price-to-sales (or "P/S") ratio of close to 2.8x in the Pharmaceuticals industry in India, you could be forgiven for feeling indifferent about Glenmark Pharmaceuticals Limited's (NSE:GLENMARK) P/S ratio of 3.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Glenmark Pharmaceuticals

How Glenmark Pharmaceuticals Has Been Performing

While the industry has experienced revenue growth lately, Glenmark Pharmaceuticals' revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Keen to find out how analysts think Glenmark Pharmaceuticals' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Glenmark Pharmaceuticals?

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

Retrospectively, the last year delivered a frustrating 4.9% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 11% in aggregate from three years ago, thanks to the earlier period of growth. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Turning to the outlook, the next year should generate growth of 11% as estimated by the twelve analysts watching the company. That's shaping up to be materially lower than the 14% growth forecast for the broader industry.

With this information, we find it interesting that Glenmark Pharmaceuticals is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

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

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Given that Glenmark Pharmaceuticals' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Glenmark Pharmaceuticals with six simple checks will allow you to discover any risks that could be an issue.

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.