Bhagiradha Chemicals & Industries Limited's (NSE:BHAGCHEM) Shares Climb 54% But Its Business Is Yet to Catch Up

Bhagiradha Chemicals & Industries Limited (NSE:BHAGCHEM) shares have continued their recent momentum with a 54% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 77%.

Following the firm bounce in price, you could be forgiven for thinking Bhagiradha Chemicals & Industries is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.4x, considering almost half the companies in India's Chemicals industry have P/S ratios below 1.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Bhagiradha Chemicals & Industries

How Bhagiradha Chemicals & Industries Has Been Performing

For example, consider that Bhagiradha Chemicals & Industries' financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Do Revenue Forecasts Match The High P/S Ratio?

Bhagiradha Chemicals & Industries' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 28% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

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

With this in mind, we find it worrying that Bhagiradha Chemicals & Industries' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Bhagiradha Chemicals & Industries' P/S soaring as well. 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.

The fact that Bhagiradha Chemicals & Industries currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Before you settle on your opinion, we've discovered 3 warning signs for Bhagiradha Chemicals & Industries that you should be aware of.

If these risks are making you reconsider your opinion on Bhagiradha Chemicals & Industries, 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.

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