Some Confidence Is Lacking In PC Jeweller Limited (NSE:PCJEWELLER) As Shares Slide 25%

To the annoyance of some shareholders, PC Jeweller Limited (NSE:PCJEWELLER) shares are down a considerable 25% in the last month, which continues a horrid run for the company. Still, a bad month hasn't completely ruined the past year with the stock gaining 63%, which is great even in a bull market.

Although its price has dipped substantially, you could still be forgiven for thinking PC Jeweller is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.2x, considering almost half the companies in India's Specialty Retail industry have P/S ratios below 1.3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for PC Jeweller

What Does PC Jeweller's Recent Performance Look Like?

Recent times have been quite advantageous for PC Jeweller as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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.

Do Revenue Forecasts Match The High P/S Ratio?

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.

Retrospectively, the last year delivered an exceptional 118% gain to the company's top line. However, this wasn't enough as the latest three year period has seen the company endure a nasty 30% drop in revenue in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 28% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that PC Jeweller'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. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From PC Jeweller's P/S?

Even after such a strong price drop, PC Jeweller's P/S still exceeds the industry median significantly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

There are also other vital risk factors to consider before investing and we've discovered 2 warning signs for PC Jeweller that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.