There's No Escaping Hindustan Petroleum Corporation Limited's (NSE:HINDPETRO) Muted Revenues

With a price-to-sales (or "P/S") ratio of 0.1x Hindustan Petroleum Corporation Limited (NSE:HINDPETRO) may be sending bullish signals at the moment, given that almost half of all the Oil and Gas companies in India have P/S ratios greater than 1.8x and even P/S higher than 6x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Hindustan Petroleum

How Has Hindustan Petroleum Performed Recently?

Recent revenue growth for Hindustan Petroleum has been in line with the industry. It might be that many expect the mediocre revenue performance to degrade, which has repressed the P/S ratio. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Hindustan Petroleum.

How Is Hindustan Petroleum's Revenue Growth Trending?

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow revenue by an impressive 88% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Shifting to the future, estimates from the analysts covering the company suggest revenue growth is heading into negative territory, declining 5.1% over the next year. With the industry predicted to deliver 8.1% growth, that's a disappointing outcome.

With this information, we are not surprised that Hindustan Petroleum is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.

The Key Takeaway

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.

With revenue forecasts that are inferior to the rest of the industry, it's no surprise that Hindustan Petroleum's P/S is on the lower end of the spectrum. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Hindustan Petroleum (1 is concerning!) that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.