There's Reason For Concern Over Gujarat Alkalies and Chemicals Limited's (NSE:GUJALKALI) Price

There wouldn't be many who think Gujarat Alkalies and Chemicals Limited's (NSE:GUJALKALI) price-to-sales (or "P/S") ratio of 1.3x is worth a mention when the median P/S for the Chemicals industry in India is similar at about 1.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Gujarat Alkalies and Chemicals

What Does Gujarat Alkalies and Chemicals' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Gujarat Alkalies and Chemicals over the last year, which is not ideal at all. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

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

How Is Gujarat Alkalies and Chemicals' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Gujarat Alkalies and Chemicals' to be considered reasonable.

Retrospectively, the last year delivered a frustrating 6.9% decrease to the company's top line. Still, the latest three year period has seen an excellent 35% overall rise in revenue, in spite of its unsatisfying short-term performance. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is predicted to deliver 16% 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 interesting that Gujarat Alkalies and Chemicals is trading at a fairly similar P/S compared to the industry. 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.

What We Can Learn From Gujarat Alkalies and Chemicals' P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Gujarat Alkalies and Chemicals 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. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Gujarat Alkalies and Chemicals that you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.