Not Many Are Piling Into Rain Industries Limited (NSE:RAIN) Just Yet

You may think that with a price-to-sales (or "P/S") ratio of 0.3x Rain Industries Limited (NSE:RAIN) is a stock worth checking out, seeing as almost half of all the Chemicals companies in India have P/S ratios greater than 1.5x and even P/S higher than 4x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Rain Industries

What Does Rain Industries' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Rain Industries over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Rain Industries 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 Rain Industries' earnings, revenue and cash flow.

How Is Rain Industries' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 24% 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 57% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that to the industry, which is only predicted to deliver 14% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it odd that Rain Industries is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What Does Rain Industries' P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We're very surprised to see Rain Industries 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 strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. 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 Rain Industries (of which 2 are potentially serious!) you should know about.

If these risks are making you reconsider your opinion on Rain Industries, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.