Take Care Before Diving Into The Deep End On Nagarjuna Fertilizers and Chemicals Limited (NSE:NAGAFERT)

You may think that with a price-to-sales (or "P/S") ratio of 0.1x Nagarjuna Fertilizers and Chemicals Limited (NSE:NAGAFERT) is a stock worth checking out, seeing as almost half of all the Chemicals companies in India have P/S ratios greater than 1.9x and even P/S higher than 5x aren't out of the ordinary. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Nagarjuna Fertilizers and Chemicals

What Does Nagarjuna Fertilizers and Chemicals' P/S Mean For Shareholders?

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. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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.

Is There Any Revenue Growth Forecasted For Nagarjuna Fertilizers and Chemicals?

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.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 16%. Even so, admirably revenue has lifted 202% in aggregate from three years ago, notwithstanding the last 12 months. 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.

Comparing that to the industry, which is only predicted to deliver 16% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's peculiar that Nagarjuna Fertilizers and Chemicals' 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

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.

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. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. 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.

Before you take the next step, you should know about the 3 warning signs for Nagarjuna Fertilizers and Chemicals (2 can't be ignored!) that we have uncovered.

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.