Subdued Growth No Barrier To Trent Limited's (NSE:TRENT) Price

When you see that almost half of the companies in the Specialty Retail industry in India have price-to-sales ratios (or "P/S") below 1x, Trent Limited (NSE:TRENT) looks to be giving off strong sell signals with its 7.3x P/S ratio. 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 Trent

What Does Trent's Recent Performance Look Like?

Trent certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Trent.

Is There Enough Revenue Growth Forecasted For Trent?

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

Taking a look back first, we see that the company grew revenue by an impressive 83% last year. The strong recent performance means it was also able to grow revenue by 136% in total over the last three years. 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 24% each year as estimated by the twelve analysts watching the company. That's shaping up to be similar to the 25% per annum growth forecast for the broader industry.

In light of this, it's curious that Trent's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Trent's P/S

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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Trent currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

You always need to take note of risks, for example - Trent has 1 warning sign we think you should be aware of.

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.