Giriraj Civil Developers Limited (NSE:GIRIRAJ) Shares Slammed 26% But Getting In Cheap Might Be Difficult Regardless

Giriraj Civil Developers Limited (NSE:GIRIRAJ) shares have had a horrible month, losing 26% after a relatively good period beforehand. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 786% in the last year.

Although its price has dipped substantially, you could still be forgiven for thinking Giriraj Civil Developers is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.7x, considering almost half the companies in India's Construction industry have P/S ratios below 2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Giriraj Civil Developers

How Giriraj Civil Developers Has Been Performing

Giriraj Civil Developers certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Giriraj Civil Developers' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Giriraj Civil Developers' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 42% gain to the company's top line. Pleasingly, revenue has also lifted 112% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Giriraj Civil Developers is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What We Can Learn From Giriraj Civil Developers' P/S?

A significant share price dive has done very little to deflate Giriraj Civil Developers' very lofty 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.

As we suspected, our examination of Giriraj Civil Developers revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Giriraj Civil Developers (2 are potentially serious) you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com