Sadbhav Engineering Limited (NSE:SADBHAV) Held Back By Insufficient Growth Even After Shares Climb 29%

The Sadbhav Engineering Limited (NSE:SADBHAV) share price has done very well over the last month, posting an excellent gain of 29%. The annual gain comes to 193% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, Sadbhav Engineering's price-to-sales (or "P/S") ratio of 0.4x might still 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 2.3x and even P/S above 5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Sadbhav Engineering

How Sadbhav Engineering Has Been Performing

For instance, Sadbhav Engineering's receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Sadbhav Engineering 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 Sadbhav Engineering will help you shine a light on its historical performance.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

Sadbhav Engineering'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.

Retrospectively, the last year delivered a frustrating 24% decrease to the company's top line. As a result, revenue from three years ago have also fallen 33% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 15% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Sadbhav Engineering's P/S is lower than most of its industry peers. 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. 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 Sadbhav Engineering's P/S?

Sadbhav Engineering's stock price has surged recently, but its but its P/S still remains modest. 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 Sadbhav Engineering confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected 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. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Sadbhav Engineering (2 make us uncomfortable) you should be aware of.

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).

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

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.