RattanIndia Enterprises Limited (NSE:RTNINDIA) Might Not Be As Mispriced As It Looks

You may think that with a price-to-sales (or "P/S") ratio of 1.6x RattanIndia Enterprises Limited (NSE:RTNINDIA) is definitely a stock worth checking out, seeing as almost half of all the Multiline Retail companies in India have P/S ratios greater than 4.9x and even P/S above 68x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for RattanIndia Enterprises

How RattanIndia Enterprises Has Been Performing

With revenue growth that's exceedingly strong of late, RattanIndia Enterprises has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

How Is RattanIndia Enterprises' Revenue Growth Trending?

In order to justify its P/S ratio, RattanIndia Enterprises would need to produce anemic growth that's substantially trailing the industry.

Retrospectively, the last year delivered an exceptional 41% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 10% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that RattanIndia Enterprises' P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

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're very surprised to see RattanIndia Enterprises currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with RattanIndia Enterprises (at least 1 which makes us a bit uncomfortable), and understanding these should be part of your investment process.

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.