Aditya Birla Fashion and Retail Limited's (NSE:ABFRL) Popularity With Investors Is Under Threat From Overpricing

When you see that almost half of the companies in the Specialty Retail industry in India have price-to-sales ratios (or "P/S") below 1.4x, Aditya Birla Fashion and Retail Limited (NSE:ABFRL) looks to be giving off some sell signals with its 2.1x 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.

We've discovered 1 warning sign about Aditya Birla Fashion and Retail. View them for free.

Check out our latest analysis for Aditya Birla Fashion and Retail

What Does Aditya Birla Fashion and Retail's P/S Mean For Shareholders?

Aditya Birla Fashion and Retail could be doing better as it's been growing revenue less than most other companies lately. 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.

Keen to find out how analysts think Aditya Birla Fashion and Retail's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Aditya Birla Fashion and Retail's Revenue Growth Trending?

In order to justify its P/S ratio, Aditya Birla Fashion and Retail would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 9.8% gain to the company's revenues. Pleasingly, revenue has also lifted 93% 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 superb for the company.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 12% over the next year. Meanwhile, the rest of the industry is forecast to expand by 26%, which is noticeably more attractive.

With this information, we find it concerning that Aditya Birla Fashion and Retail is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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 Does Aditya Birla Fashion and Retail's 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.

It comes as a surprise to see Aditya Birla Fashion and Retail trade at such a high P/S given the revenue forecasts look less than stellar. 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. At these price levels, investors should remain cautious, particularly if things don't improve.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Aditya Birla Fashion and Retail 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.