Mangalam Organics Limited's (NSE:MANORG) Shares Bounce 27% But Its Business Still Trails The Industry

Mangalam Organics Limited (NSE:MANORG) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Although its price has surged higher, Mangalam Organics' price-to-sales (or "P/S") ratio of 0.8x might still make it look like a buy right now compared to the Chemicals industry in India, where around half of the companies have P/S ratios above 1.8x and even P/S above 4x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Mangalam Organics

What Does Mangalam Organics' Recent Performance Look Like?

For example, consider that Mangalam Organics' financial performance has been pretty ordinary lately as revenue growth is non-existent. One possibility is that the P/S is low because investors think this benign revenue growth rate will likely underperform the broader industry in the near future. Those who are bullish on Mangalam Organics 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 Mangalam Organics, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Mangalam Organics' Revenue Growth Trending?

In order to justify its P/S ratio, Mangalam Organics would need to produce sluggish growth that's trailing the industry.

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 27% in total over the last three years. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

This is in contrast to the rest of the industry, which is expected to grow by 14% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we can see why Mangalam Organics is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

The Bottom Line On Mangalam Organics' P/S

Despite Mangalam Organics' share price climbing recently, its P/S still lags most other companies. 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.

In line with expectations, Mangalam Organics maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Plus, you should also learn about these 3 warning signs we've spotted with Mangalam Organics (including 2 which make us uncomfortable).

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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