Capital India Finance Limited (NSE:CIFL) Looks Inexpensive But Perhaps Not Attractive Enough

You may think that with a price-to-sales (or "P/S") ratio of 2.3x Capital India Finance Limited (NSE:CIFL) is definitely a stock worth checking out, seeing as almost half of all the Diversified Financial companies in India have P/S ratios greater than 8.2x and even P/S above 19x aren't out of the ordinary. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Capital India Finance

How Has Capital India Finance Performed Recently?

As an illustration, revenue has deteriorated at Capital India Finance over the last year, which is not ideal at all. 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 Capital India Finance will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Capital India Finance's earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as depressed as Capital India Finance's is when the company's growth is on track to lag the industry decidedly.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. This means it has also seen a slide in revenue over the longer-term as revenue is down 6.2% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 20% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we understand why Capital India Finance'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.

The Final Word

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Capital India Finance 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. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You should always think about risks. Case in point, we've spotted 2 warning signs for Capital India Finance you should be aware of, and 1 of them is potentially serious.

If you're unsure about the strength of Capital India Finance's 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.