Trent Limited (NSE:TRENT) Looks Just Right With A 26% Price Jump

Despite an already strong run, Trent Limited (NSE:TRENT) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 229% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking Trent is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.7x, considering almost half the companies in India's Specialty Retail industry have P/S ratios below 1.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Trent

How Trent Has Been Performing

Trent could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Trent's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, Trent would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 53% 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.

Looking ahead now, revenue is anticipated to climb by 30% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 27% per year growth forecast for the broader industry.

With this information, we can see why Trent is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Trent's P/S?

Shares in Trent have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

As we suspected, our examination of Trent's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Before you take the next step, you should know about the 1 warning sign for Trent that we have uncovered.

If these risks are making you reconsider your opinion on Trent, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.