McLeod Russel India Limited's (NSE:MCLEODRUSS) Shares Bounce 25% But Its Business Still Trails The Industry

The McLeod Russel India Limited (NSE:MCLEODRUSS) share price has done very well over the last month, posting an excellent gain of 25%. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.4% over the last year.

In spite of the firm bounce in price, given about half the companies operating in India's Food industry have price-to-sales ratios (or "P/S") above 1.1x, you may still consider McLeod Russel India as an attractive investment with its 0.2x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for McLeod Russel India

What Does McLeod Russel India's P/S Mean For Shareholders?

We'd have to say that with no tangible growth over the last year, McLeod Russel India's revenue has been unimpressive. It might be that many expect the uninspiring revenue performance to worsen, 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 McLeod Russel India will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like McLeod Russel India's to be considered reasonable.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. The longer-term trend has been no better as the company has no revenue growth to show for over the last three years either. Therefore, it's fair to say that revenue growth has definitely eluded the company recently.

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.

With this information, we can see why McLeod Russel India is trading at a P/S lower than the industry. 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 Final Word

McLeod Russel India's stock price has surged recently, but its but its P/S still remains modest. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of McLeod Russel India confirms that the company's revenue trends over the past three-year years are a key factor in its low price-to-sales ratio, as we suspected, given they fall short of 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.

And what about other risks? Every company has them, and we've spotted 3 warning signs for McLeod Russel India (of which 1 is potentially serious!) you should know about.

If you're unsure about the strength of McLeod Russel India's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.