Risks To Shareholder Returns Are Elevated At These Prices For FSN E-Commerce Ventures Limited (NSE:NYKAA)

When close to half the companies in the Specialty Retail industry in India have price-to-sales ratios (or "P/S") below 1.9x, you may consider FSN E-Commerce Ventures Limited (NSE:NYKAA) as a stock to avoid entirely with its 7x 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.

See our latest analysis for FSN E-Commerce Ventures

How Has FSN E-Commerce Ventures Performed Recently?

FSN E-Commerce Ventures could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on FSN E-Commerce Ventures will help you uncover what's on the horizon.

How Is FSN E-Commerce Ventures' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like FSN E-Commerce Ventures' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 24% gain to the company's top line. The latest three year period has also seen an excellent 118% overall rise in revenue, aided by its short-term performance. 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 26% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 28% per annum, which is not materially different.

With this information, we find it interesting that FSN E-Commerce Ventures is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

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.

Analysts are forecasting FSN E-Commerce Ventures' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with FSN E-Commerce Ventures, and understanding should be part of your investment process.

If you're unsure about the strength of FSN E-Commerce Ventures' 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.