Madras Fertilizers Limited's (NSE:MADRASFERT) Shares Not Telling The Full Story

When close to half the companies operating in the Chemicals industry in India have price-to-sales ratios (or "P/S") above 1.5x, you may consider Madras Fertilizers Limited (NSE:MADRASFERT) as an attractive investment with its 0.7x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Madras Fertilizers

What Does Madras Fertilizers' Recent Performance Look Like?

As an illustration, revenue has deteriorated at Madras Fertilizers over the last year, which is not ideal at all. Perhaps the market believes the recent revenue performance isn't good enough to keep up the industry, causing the P/S ratio to suffer. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

Madras Fertilizers' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 35%. Even so, admirably revenue has lifted 49% in aggregate from three years ago, notwithstanding the last 12 months. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Madras Fertilizers' P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

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.

Our examination of Madras Fertilizers revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Plus, you should also learn about this 1 warning sign we've spotted with Madras Fertilizers.

If you're unsure about the strength of Madras Fertilizers' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.