Subdued Growth No Barrier To Zuari Industries Limited (NSE:ZUARIIND) With Shares Advancing 49%

Despite an already strong run, Zuari Industries Limited (NSE:ZUARIIND) shares have been powering on, with a gain of 49% in the last thirty days. The annual gain comes to 125% following the latest surge, making investors sit up and take notice.

Even after such a large jump in price, there still wouldn't be many who think Zuari Industries' price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in India's Food industry is similar at about 1.1x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for Zuari Industries

How Zuari Industries Has Been Performing

The revenue growth achieved at Zuari Industries over the last year would be more than acceptable for most companies. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. Those who are bullish on Zuari Industries will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Zuari Industries' earnings, revenue and cash flow.

How Is Zuari Industries' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Zuari Industries' is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a terrific increase of 24%. Revenue has also lifted 16% in aggregate from three years ago, mostly thanks to the last 12 months of growth. 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 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Zuari Industries' P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Zuari Industries' P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Zuari Industries revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

There are also other vital risk factors to consider and we've discovered 5 warning signs for Zuari Industries (2 are significant!) that you should be aware of before investing here.

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.