Revenues Not Telling The Story For The Fertilisers and Chemicals Travancore Limited (NSE:FACT) After Shares Rise 28%

Those holding The Fertilisers and Chemicals Travancore Limited (NSE:FACT) shares would be relieved that the share price has rebounded 28% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Looking further back, the 15% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

After such a large jump in price, you could be forgiven for thinking Fertilisers and Chemicals Travancore is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 12.7x, considering almost half the companies in India's Chemicals industry have P/S ratios below 1.4x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

We've discovered 1 warning sign about Fertilisers and Chemicals Travancore. View them for free.

View our latest analysis for Fertilisers and Chemicals Travancore

What Does Fertilisers and Chemicals Travancore's P/S Mean For Shareholders?

For example, consider that Fertilisers and Chemicals Travancore's 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Fertilisers and Chemicals Travancore's earnings, revenue and cash flow.

How Is Fertilisers and Chemicals Travancore's Revenue Growth Trending?

Fertilisers and Chemicals Travancore's 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.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 23%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 14% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with 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 momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we find it concerning that Fertilisers and Chemicals Travancore is trading at a P/S higher than the industry. 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 Fertilisers and Chemicals Travancore's P/S

The strong share price surge has lead to Fertilisers and Chemicals Travancore's P/S soaring as well. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

The fact that Fertilisers and Chemicals Travancore 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. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Fertilisers and Chemicals Travancore that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.