Exxaro Tiles Limited (NSE:EXXARO) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Exxaro Tiles Limited (NSE:EXXARO) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 2.6% isn't as impressive.

In spite of the firm bounce in price, there still wouldn't be many who think Exxaro Tiles' price-to-sales (or "P/S") ratio of 1.3x is worth a mention when it essentially matches the median P/S in India's Building industry. 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.

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View our latest analysis for Exxaro Tiles

What Does Exxaro Tiles' P/S Mean For Shareholders?

The revenue growth achieved at Exxaro Tiles over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on Exxaro Tiles 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 Exxaro Tiles will help you shine a light on its historical performance.

How Is Exxaro Tiles' Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 12%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 5.2% in total over the last three years. 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 16% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we find it worrying that Exxaro Tiles' P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Final Word

Exxaro Tiles appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Exxaro Tiles currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Before you settle on your opinion, we've discovered 3 warning signs for Exxaro Tiles (2 are a bit concerning!) that you should be aware of.

If you're unsure about the strength of Exxaro Tiles' 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.