Shoppers Stop Limited (NSE:SHOPERSTOP) Might Not Be As Mispriced As It Looks

With a price-to-sales (or "P/S") ratio of 1.9x Shoppers Stop Limited (NSE:SHOPERSTOP) may be sending very bullish signals at the moment, given that almost half of all the Multiline Retail companies in India have P/S ratios greater than 6.7x and even P/S higher than 59x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Shoppers Stop

How Has Shoppers Stop Performed Recently?

With revenue growth that's inferior to most other companies of late, Shoppers Stop has been relatively sluggish. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Shoppers Stop will help you uncover what's on the horizon.

Is There Any Revenue Growth Forecasted For Shoppers Stop?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.3% last year. The latest three year period has also seen an excellent 147% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next three years should generate growth of 16% per year as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 6.4% each year, which is noticeably less attractive.

With this information, we find it odd that Shoppers Stop is trading at a P/S lower than the industry. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

To us, it seems Shoppers Stop currently trades on a significantly depressed P/S given its forecasted revenue growth is higher than the rest of its industry. When we see strong growth forecasts like this, we can only assume potential risks are what might be placing significant pressure on the P/S ratio. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shoppers Stop (1 is significant!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.