A2Z Infra Engineering Limited (NSE:A2ZINFRA) Shares Fly 27% But Investors Aren't Buying For Growth

Despite an already strong run, A2Z Infra Engineering Limited (NSE:A2ZINFRA) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 139% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, A2Z Infra Engineering's price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Construction industry in India, where around half of the companies have P/S ratios above 2.2x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for A2Z Infra Engineering

How Has A2Z Infra Engineering Performed Recently?

The recent revenue growth at A2Z Infra Engineering would have to be considered satisfactory if not spectacular. It might be that many expect the respectable revenue performance to degrade, which has repressed the P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on A2Z Infra Engineering will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

A2Z Infra Engineering's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 6.6% last year. Still, lamentably revenue has fallen 7.7% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that A2Z Infra Engineering's P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does A2Z Infra Engineering's P/S Mean For Investors?

The latest share price surge wasn't enough to lift A2Z Infra Engineering's P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of A2Z Infra Engineering revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 2 warning signs for A2Z Infra Engineering (1 is a bit unpleasant!) that you need to be mindful of.

If you're unsure about the strength of A2Z Infra Engineering'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.