There's Reason For Concern Over Camlin Fine Sciences Limited's (NSE:CAMLINFINE) Massive 25% Price Jump

The Camlin Fine Sciences Limited (NSE:CAMLINFINE) share price has done very well over the last month, posting an excellent gain of 25%. The last 30 days bring the annual gain to a very sharp 67%.

After such a large jump in price, given close to half the companies operating in India's Chemicals industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Camlin Fine Sciences as a stock to potentially avoid with its 1.9x 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 as high as it is.

Our free stock report includes 3 warning signs investors should be aware of before investing in Camlin Fine Sciences. Read for free now.

View our latest analysis for Camlin Fine Sciences

How Has Camlin Fine Sciences Performed Recently?

It looks like revenue growth has deserted Camlin Fine Sciences recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, which has kept the P/S from collapsing. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Camlin Fine Sciences' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Camlin Fine Sciences' 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. Fortunately, a few good years before that means that it was still able to grow revenue by 23% in total over the last three years. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 14% shows it's noticeably less attractive.

In light of this, it's alarming that Camlin Fine Sciences' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Camlin Fine Sciences' P/S

Camlin Fine Sciences shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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 Camlin Fine Sciences revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with Camlin Fine Sciences, and understanding them should be part of your investment process.

If these risks are making you reconsider your opinion on Camlin Fine Sciences, 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.