Sun Pharma Advanced Research Company Limited's (NSE:SPARC) Business Is Trailing The Industry But Its Shares Aren't

When you see that almost half of the companies in the Pharmaceuticals industry in India have price-to-sales ratios (or "P/S") below 2.2x, Sun Pharma Advanced Research Company Limited (NSE:SPARC) looks to be giving off strong sell signals with its 37.6x P/S ratio. 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 Sun Pharma Advanced Research

What Does Sun Pharma Advanced Research's P/S Mean For Shareholders?

Recent times have been quite advantageous for Sun Pharma Advanced Research as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Sun Pharma Advanced Research, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sun Pharma Advanced Research's Revenue Growth Trending?

In order to justify its P/S ratio, Sun Pharma Advanced Research would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 52% last year. However, this wasn't enough as the latest three year period has seen the company endure a nasty 8.8% drop in revenue in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 12% shows it's an unpleasant look.

In light of this, it's alarming that Sun Pharma Advanced Research's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

What Does Sun Pharma Advanced Research's 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.

We've established that Sun Pharma Advanced Research currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

You need to take note of risks, for example - Sun Pharma Advanced Research has 2 warning signs (and 1 which shouldn't be ignored) we think 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.