PC Jeweller Limited's (NSE:PCJEWELLER) 30% Share Price Surge Not Quite Adding Up

Despite an already strong run, PC Jeweller Limited (NSE:PCJEWELLER) shares have been powering on, with a gain of 30% in the last thirty days. The last 30 days were the cherry on top of the stock's 331% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, you could be forgiven for thinking PC Jeweller is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.8x, considering almost half the companies in India's Specialty Retail industry have P/S ratios below 2.1x. 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 PC Jeweller

What Does PC Jeweller's Recent Performance Look Like?

For example, consider that PC Jeweller's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on PC Jeweller will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For PC Jeweller?

The only time you'd be truly comfortable seeing a P/S as steep as PC Jeweller's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 53%. This means it has also seen a slide in revenue over the longer-term as revenue is down 69% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 35% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that PC Jeweller's P/S sits above the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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.

The Key Takeaway

The strong share price surge has lead to PC Jeweller's P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that PC Jeweller currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

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

If these risks are making you reconsider your opinion on PC Jeweller, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.