Some Veste S.A. Estilo (BVMF:VSTE3) Shareholders Look For Exit As Shares Take 26% Pounding

Simply Wall St · 10/18 09:09

Veste S.A. Estilo (BVMF:VSTE3) shareholders that were waiting for something to happen have been dealt a blow with a 26% share price drop in the last month. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 17% in that time.

In spite of the heavy fall in price, you could still be forgiven for feeling indifferent about Veste Estilo's P/S ratio of 1x, since the median price-to-sales (or "P/S") ratio for the Luxury industry in Brazil is about the same. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Veste Estilo

ps-multiple-vs-industry
BOVESPA:VSTE3 Price to Sales Ratio vs Industry October 18th 2024

What Does Veste Estilo's Recent Performance Look Like?

Veste Estilo hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

Is There Some Revenue Growth Forecasted For Veste Estilo?

In order to justify its P/S ratio, Veste Estilo would need to produce growth that's similar to the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.1%. Still, the latest three year period has seen an excellent 55% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 7.4% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 41%, which is noticeably more attractive.

In light of this, it's curious that Veste Estilo's P/S sits in line with the majority of other companies. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

The Bottom Line On Veste Estilo's P/S

With its share price dropping off a cliff, the P/S for Veste Estilo looks to be in line with the rest of the Luxury industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

When you consider that Veste Estilo's revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Veste Estilo, and understanding these should be part of your investment process.

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).