Why We're Not Concerned Yet About Neogen Chemicals Limited's (NSE:NEOGEN) 26% Share Price Plunge

The Neogen Chemicals Limited (NSE:NEOGEN) share price has fared very poorly over the last month, falling by a substantial 26%. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 49% in that time.

Although its price has dipped substantially, you could still be forgiven for thinking Neogen Chemicals is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.9x, considering almost half the companies in India's Chemicals industry have P/S ratios below 1.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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View our latest analysis for Neogen Chemicals

What Does Neogen Chemicals' Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, Neogen Chemicals has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neogen Chemicals.

Is There Enough Revenue Growth Forecasted For Neogen Chemicals?

Neogen Chemicals' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 8.4%. This was backed up an excellent period prior to see revenue up by 37% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 50% each year during the coming three years according to the six analysts following the company. With the industry only predicted to deliver 13% each year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Neogen Chemicals' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Neogen Chemicals' P/S Mean For Investors?

Even after such a strong price drop, Neogen Chemicals' P/S still exceeds the industry median significantly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Neogen Chemicals maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Chemicals industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Neogen Chemicals (2 are significant) you should be aware of.

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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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.