Take Care Before Jumping Onto Construtora Adolpho Lindenberg S.A. (BVMF:CALI3) Even Though It's 26% Cheaper

Construtora Adolpho Lindenberg S.A. (BVMF:CALI3) shares have had a horrible month, losing 26% after a relatively good period beforehand. To make matters worse, the recent drop has wiped out a year's worth of gains with the share price now back where it started a year ago.

Even after such a large drop in price, there still wouldn't be many who think Construtora Adolpho Lindenberg's price-to-sales (or "P/S") ratio of 0.8x is worth a mention when the median P/S in Brazil's Construction industry is similar at about 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for Construtora Adolpho Lindenberg

What Does Construtora Adolpho Lindenberg's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Construtora Adolpho Lindenberg has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

Although there are no analyst estimates available for Construtora Adolpho Lindenberg, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For Construtora Adolpho Lindenberg?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Construtora Adolpho Lindenberg's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 141% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 107% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 9.3%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's curious that Construtora Adolpho Lindenberg's P/S sits in line with the majority of other companies. Apparently some shareholders believe the recent performance is at its limits and have been accepting lower selling prices.

What We Can Learn From Construtora Adolpho Lindenberg's P/S?

Following Construtora Adolpho Lindenberg's share price tumble, its P/S is just clinging on to the industry median 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.

We didn't quite envision Construtora Adolpho Lindenberg's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. When we see strong revenue with faster-than-industry growth, we can only assume potential risks are what might be placing pressure on the P/S ratio. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 6 warning signs with Construtora Adolpho Lindenberg (at least 5 which can't be ignored), and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.