Benign Growth For Godha Cabcon & Insulation Limited (NSE:GODHA) Underpins Stock's 30% Plummet

Godha Cabcon & Insulation Limited (NSE:GODHA) shareholders that were waiting for something to happen have been dealt a blow with a 30% share price drop in the last month. Instead of being rewarded, shareholders who have already held through the last twelve months are now sitting on a 23% share price drop.

Following the heavy fall in price, Godha Cabcon & Insulation may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.3x, since almost half of all companies in the Electrical industry in India have P/S ratios greater than 2.7x and even P/S higher than 5x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

We've discovered 2 warning signs about Godha Cabcon & Insulation. View them for free.

View our latest analysis for Godha Cabcon & Insulation

What Does Godha Cabcon & Insulation's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Godha Cabcon & Insulation has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

How Is Godha Cabcon & Insulation's Revenue Growth Trending?

Godha Cabcon & Insulation's P/S ratio would be typical for a company that's expected to deliver very poor growth or even falling revenue, and importantly, perform much worse than the industry.

Retrospectively, the last year delivered an explosive gain to the company's top line. The latest three year period has also seen an excellent 106% overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 31% shows it's noticeably less attractive.

In light of this, it's understandable that Godha Cabcon & Insulation's P/S sits below the majority of other companies. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Final Word

Having almost fallen off a cliff, Godha Cabcon & Insulation's share price has pulled its P/S way down as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Godha Cabcon & Insulation confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Godha Cabcon & Insulation, and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Godha Cabcon & Insulation, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.