Gokul Refoils & Solvent Limited (NSE:GOKUL) Held Back By Insufficient Growth Even After Shares Climb 32%

The Gokul Refoils & Solvent Limited (NSE:GOKUL) share price has done very well over the last month, posting an excellent gain of 32%. The last 30 days bring the annual gain to a very sharp 75%.

In spite of the firm bounce in price, Gokul Refoils & Solvent's price-to-sales (or "P/S") ratio of 0.2x might still make it look like a buy right now compared to the Food industry in India, where around half of the companies have P/S ratios above 1.3x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Gokul Refoils & Solvent

What Does Gokul Refoils & Solvent's P/S Mean For Shareholders?

Revenue has risen firmly for Gokul Refoils & Solvent recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If you 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gokul Refoils & Solvent will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Gokul Refoils & Solvent?

In order to justify its P/S ratio, Gokul Refoils & Solvent would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The latest three year period has also seen a 22% overall rise in revenue, aided extensively by its short-term performance. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 13% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Gokul Refoils & Solvent's P/S sits below the majority of other companies. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

The Key Takeaway

The latest share price surge wasn't enough to lift Gokul Refoils & Solvent's P/S close to the industry median. 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.

As we suspected, our examination of Gokul Refoils & Solvent revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You should always think about risks. Case in point, we've spotted 5 warning signs for Gokul Refoils & Solvent you should be aware of, and 2 of them are significant.

If these risks are making you reconsider your opinion on Gokul Refoils & Solvent, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.