Shareholders Should Be Pleased With Vodafone Idea Limited's (NSE:IDEA) Price

When you see that almost half of the companies in the Wireless Telecom industry in India have price-to-sales ratios (or "P/S") below 1.5x, Vodafone Idea Limited (NSE:IDEA) looks to be giving off some sell signals with its 2.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Vodafone Idea

What Does Vodafone Idea's P/S Mean For Shareholders?

Recent times haven't been great for Vodafone Idea as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Vodafone Idea?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Vodafone Idea's to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. That's essentially a continuation of what we've seen over the last three years, as its revenue growth has been virtually non-existent for that entire period. Accordingly, shareholders probably wouldn't have been satisfied with the complete absence of medium-term growth.

Looking ahead now, revenue is anticipated to climb by 13% per annum during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 6.1% each year growth forecast for the broader industry.

In light of this, it's understandable that Vodafone Idea's P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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've established that Vodafone Idea maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Wireless Telecom industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Vodafone Idea (1 shouldn't be ignored!) that you need to be mindful of.

If you're unsure about the strength of Vodafone Idea's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.