Kohinoor Foods Limited's (NSE:KOHINOOR) 25% Price Boost Is Out Of Tune With Revenues

Kohinoor Foods Limited (NSE:KOHINOOR) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 45% in the last year.

Since its price has surged higher, when almost half of the companies in India's Food industry have price-to-sales ratios (or "P/S") below 1.3x, you may consider Kohinoor Foods as a stock probably not worth researching with its 2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Kohinoor Foods

How Has Kohinoor Foods Performed Recently?

Kohinoor Foods has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is high because investors think this good revenue growth will be enough to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Kohinoor Foods, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Kohinoor Foods' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Kohinoor Foods' to be considered reasonable.

Retrospectively, the last year delivered a decent 7.5% gain to the company's revenues. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 60% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 13% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Kohinoor Foods' P/S exceeds that of its industry peers. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

The Key Takeaway

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

Our examination of Kohinoor Foods revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

You need to take note of risks, for example - Kohinoor Foods has 2 warning signs (and 1 which is potentially serious) we think you should know about.

If these risks are making you reconsider your opinion on Kohinoor Foods, 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.