Optimistic Investors Push Aditya Birla Fashion and Retail Limited (NSE:ABFRL) Shares Up 28% But Growth Is Lacking

Aditya Birla Fashion and Retail Limited (NSE:ABFRL) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Taking a wider view, although not as strong as the last month, the full year gain of 19% is also fairly reasonable.

In spite of the firm bounce in price, there still wouldn't be many who think Aditya Birla Fashion and Retail's price-to-sales (or "P/S") ratio of 2x is worth a mention when the median P/S in India's Specialty Retail industry is similar at about 1.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Aditya Birla Fashion and Retail

What Does Aditya Birla Fashion and Retail's Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Aditya Birla Fashion and Retail has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. 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 Aditya Birla Fashion and Retail's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Aditya Birla Fashion and Retail's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. Pleasingly, revenue has also lifted 156% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 15% per annum as estimated by the analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 25% per annum, which is noticeably more attractive.

With this information, we find it interesting that Aditya Birla Fashion and Retail is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now Aditya Birla Fashion and Retail's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Given that Aditya Birla Fashion and Retail's 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.

Before you settle on your opinion, we've discovered 2 warning signs for Aditya Birla Fashion and Retail that you should be aware of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.