There Is A Reason Mahindra EPC Irrigation Limited's (NSE:MAHEPC) Price Is Undemanding

You may think that with a price-to-sales (or "P/S") ratio of 1.2x Mahindra EPC Irrigation Limited (NSE:MAHEPC) is a stock worth checking out, seeing as almost half of all the Machinery companies in India have P/S ratios greater than 2.4x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Mahindra EPC Irrigation

What Does Mahindra EPC Irrigation's Recent Performance Look Like?

The revenue growth achieved at Mahindra EPC Irrigation over the last year would be more than acceptable for most companies. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be 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 Mahindra EPC Irrigation will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as Mahindra EPC Irrigation's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 27% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 1.2% overall. 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 13% shows it's an unpleasant look.

In light of this, it's understandable that Mahindra EPC Irrigation's P/S would sit below the majority of other companies. 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 Mahindra EPC Irrigation's P/S?

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Mahindra EPC Irrigation revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Mahindra EPC Irrigation (of which 1 is concerning!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.