Little Excitement Around AksharChem (India) Limited's (NSE:AKSHARCHEM) Revenues

You may think that with a price-to-sales (or "P/S") ratio of 0.7x AksharChem (India) Limited (NSE:AKSHARCHEM) is a stock worth checking out, seeing as almost half of all the Chemicals companies in India have P/S ratios greater than 1.6x and even P/S higher than 4x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for AksharChem (India)

What Does AksharChem (India)'s Recent Performance Look Like?

Revenue has risen firmly for AksharChem (India) recently, which is pleasing to see. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. Those who are bullish on AksharChem (India) will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on AksharChem (India) will help you shine a light on its historical performance.

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

The only time you'd be truly comfortable seeing a P/S as low as AksharChem (India)'s is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 15% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 9.0% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's understandable that AksharChem (India)'s P/S would sit below the majority of other companies. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From AksharChem (India)'s P/S?

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 AksharChem (India) confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with AksharChem (India) (at least 1 which makes us a bit uncomfortable), and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on AksharChem (India), 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.