A2Z Infra Engineering Limited's (NSE:A2ZINFRA) Price Is Right But Growth Is Lacking

With a price-to-sales (or "P/S") ratio of 0.6x A2Z Infra Engineering Limited (NSE:A2ZINFRA) may be sending bullish signals at the moment, given that almost half of all the Construction companies in India have P/S ratios greater than 1.7x and even P/S higher than 5x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for A2Z Infra Engineering

What Does A2Z Infra Engineering's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for A2Z Infra Engineering, which is generally not a bad outcome. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. Those who are bullish on A2Z Infra Engineering will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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.

If we review the last year of revenue growth, the company posted a worthy increase of 4.4%. Still, lamentably revenue has fallen 22% in aggregate from three years ago, which is disappointing. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 11% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that A2Z Infra Engineering is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From A2Z Infra Engineering's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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.

There are also other vital risk factors to consider and we've discovered 2 warning signs for A2Z Infra Engineering (1 shouldn't be ignored!) that you should be aware of before investing here.

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.