Praxis Home Retail Limited's (NSE:PRAXIS) 30% Price Boost Is Out Of Tune With Revenues

Praxis Home Retail Limited (NSE:PRAXIS) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 42% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that Praxis Home Retail's price-to-sales (or "P/S") ratio of 1.6x right now seems quite "middle-of-the-road" compared to the Specialty Retail industry in India, where the median P/S ratio is around 1.7x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Praxis Home Retail

What Does Praxis Home Retail's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Praxis Home Retail over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Praxis Home Retail, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Praxis Home Retail's Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 36% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 37% in aggregate. 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 31% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that Praxis Home Retail is trading at a fairly similar P/S compared to the industry. 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 on the share price eventually.

What Does Praxis Home Retail's P/S Mean For Investors?

Its shares have lifted substantially and now Praxis Home Retail's P/S is back within range of the industry median. 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.

The fact that Praxis Home Retail currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you take the next step, you should know about the 4 warning signs for Praxis Home Retail (2 shouldn't be ignored!) that we have uncovered.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.