Even With A 25% Surge, Cautious Investors Are Not Rewarding Nagarjuna Fertilizers and Chemicals Limited's (NSE:NAGAFERT) Performance Completely

Nagarjuna Fertilizers and Chemicals Limited (NSE:NAGAFERT) shareholders have had their patience rewarded with a 25% share price jump in the last month. Taking a wider view, although not as strong as the last month, the full year gain of 25% is also fairly reasonable.

In spite of the firm bounce in price, Nagarjuna Fertilizers and Chemicals' price-to-sales (or "P/S") ratio of 0.2x 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 1.6x 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.

Check out our latest analysis for Nagarjuna Fertilizers and Chemicals

How Nagarjuna Fertilizers and Chemicals Has Been Performing

As an illustration, revenue has deteriorated at Nagarjuna Fertilizers and Chemicals 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. Those who are bullish on Nagarjuna Fertilizers and Chemicals will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Nagarjuna Fertilizers and Chemicals' earnings, revenue and cash flow.

How Is Nagarjuna Fertilizers and Chemicals' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as low as Nagarjuna Fertilizers and Chemicals' is when the company's growth is on track to lag the industry.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 203% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate 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 lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Nagarjuna Fertilizers and Chemicals' P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Nagarjuna Fertilizers and Chemicals' P/S?

Despite Nagarjuna Fertilizers and Chemicals' share price climbing recently, its P/S still lags most other companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We're very surprised to see Nagarjuna Fertilizers and Chemicals currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Nagarjuna Fertilizers and Chemicals (of which 2 make us uncomfortable!) you should know about.

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.