IL&FS Engineering and Construction Company Limited's (NSE:IL&FSENGG) 26% Dip In Price Shows Sentiment Is Matching Revenues

To the annoyance of some shareholders, IL&FS Engineering and Construction Company Limited (NSE:IL&FSENGG) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 136% in the last twelve months.

After such a large drop in price, IL&FS Engineering and Construction's price-to-sales (or "P/S") ratio of 1.4x might 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 2.1x and even P/S above 5x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for IL&FS Engineering and Construction

What Does IL&FS Engineering and Construction's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, IL&FS Engineering and Construction has been doing very well. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If that doesn't eventuate, then existing shareholders have reason to be quite 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 IL&FS Engineering and Construction will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

IL&FS Engineering and Construction'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 terrific increase of 36%. Still, revenue has fallen 28% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this information, we are not surprised that IL&FS Engineering and Construction is trading at a P/S lower than the industry. 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Final Word

The southerly movements of IL&FS Engineering and Construction's shares means its P/S is now sitting at a pretty low level. 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 IL&FS Engineering and Construction 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. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

We don't want to rain on the parade too much, but we did also find 2 warning signs for IL&FS Engineering and Construction (1 shouldn't be ignored!) that you need to be mindful of.

If these risks are making you reconsider your opinion on IL&FS Engineering and Construction, 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.