Revenues Not Telling The Story For Agro Tech Foods Limited (NSE:ATFL) After Shares Rise 26%

Agro Tech Foods Limited (NSE:ATFL) shareholders have had their patience rewarded with a 26% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 5.3% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking Agro Tech Foods is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.8x, considering almost half the companies in India's Food industry have P/S ratios below 1.2x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Agro Tech Foods

What Does Agro Tech Foods' P/S Mean For Shareholders?

Agro Tech Foods hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

The only time you'd be truly comfortable seeing a P/S as high as Agro Tech Foods' is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 11%. As a result, revenue from three years ago have also fallen 15% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 4.1% during the coming year according to the lone analyst following the company. Meanwhile, the rest of the industry is forecast to expand by 12%, which is noticeably more attractive.

With this in consideration, we believe it doesn't make sense that Agro Tech Foods' P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

The large bounce in Agro Tech Foods' shares has lifted the company's P/S handsomely. 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.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Agro Tech Foods, this doesn't appear to be impacting the P/S in the slightest. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Agro Tech Foods that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

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