Benign Growth For Chennai Petroleum Corporation Limited (NSE:CHENNPETRO) Underpins Stock's 33% Plummet

The Chennai Petroleum Corporation Limited (NSE:CHENNPETRO) share price has fared very poorly over the last month, falling by a substantial 33%. Indeed, the recent drop has reduced its annual gain to a relatively sedate 9.1% over the last twelve months.

Following the heavy fall in price, Chennai Petroleum's price-to-sales (or "P/S") ratio of 0.1x might make it look like a strong buy right now compared to the wider Oil and Gas 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. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Chennai Petroleum

How Chennai Petroleum Has Been Performing

Chennai Petroleum could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If you still like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Keen to find out how analysts think Chennai Petroleum's future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Chennai Petroleum would need to produce anemic growth that's substantially trailing the industry.

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 1.2%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 104% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 1.0% as estimated by the one analyst watching the company. That's shaping up to be materially lower than the 5.4% growth forecast for the broader industry.

With this in consideration, its clear as to why Chennai Petroleum's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What We Can Learn From Chennai Petroleum's P/S?

Chennai Petroleum's P/S looks about as weak as its stock price lately. 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.

We've established that Chennai Petroleum maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 5 warning signs for Chennai Petroleum you should be aware of, and 3 of them are significant.

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.