Raj Rayon Industries Limited's (NSE:RAJRILTD) Share Price Could Signal Some Risk

There wouldn't be many who think Raj Rayon Industries Limited's (NSE:RAJRILTD) price-to-sales (or "P/S") ratio of 1.4x is worth a mention when the median P/S for the Luxury industry in India is similar at about 1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for Raj Rayon Industries

How Has Raj Rayon Industries Performed Recently?

Recent times have been quite advantageous for Raj Rayon Industries as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to taper off, which has kept the P/S from rising. If that doesn't eventuate, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Raj Rayon Industries' earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Raj Rayon Industries' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 76%. Still, revenue has barely risen at all from three years ago in total, which is not ideal. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 97% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that Raj Rayon Industries is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Raj Rayon Industries' P/S

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Raj Rayon Industries' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

Many other vital risk factors can be found on the company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Raj Rayon Industries with six simple checks.

If you're unsure about the strength of Raj Rayon Industries' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.