Subdued Growth No Barrier To Malu Paper Mills Limited (NSE:MALUPAPER) With Shares Advancing 25%

Malu Paper Mills Limited (NSE:MALUPAPER) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 5.6% isn't as impressive.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about Malu Paper Mills' P/S ratio of 0.3x, since the median price-to-sales (or "P/S") ratio for the Forestry industry in India is also close to 0.7x. 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.

We've discovered 3 warning signs about Malu Paper Mills. View them for free.

Check out our latest analysis for Malu Paper Mills

How Malu Paper Mills Has Been Performing

For example, consider that Malu Paper Mills' financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. Those who are bullish on Malu Paper Mills will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

How Is Malu Paper Mills' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Malu Paper Mills' 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. However, a few strong years before that means that it was still able to grow revenue by an impressive 30% in total over the last three years. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Comparing that to the industry, which is predicted to deliver 24% 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 intriguing that Malu Paper Mills' P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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 Malu Paper Mills' P/S?

Malu Paper Mills' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Malu Paper Mills' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. 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.

Plus, you should also learn about these 3 warning signs we've spotted with Malu Paper Mills (including 2 which are a bit concerning).

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.