Improved Revenues Required Before Rama Phosphates Limited (NSE:RAMAPHO) Stock's 39% Jump Looks Justified

Rama Phosphates Limited (NSE:RAMAPHO) shareholders would be excited to see that the share price has had a great month, posting a 39% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 34% in the last year.

In spite of the firm bounce in price, Rama Phosphates' price-to-sales (or "P/S") ratio of 0.6x 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 1.4x 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.

Our free stock report includes 3 warning signs investors should be aware of before investing in Rama Phosphates. Read for free now.

View our latest analysis for Rama Phosphates

How Has Rama Phosphates Performed Recently?

Revenue has risen firmly for Rama Phosphates recently, which is pleasing to see. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Although there are no analyst estimates available for Rama Phosphates, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Rama Phosphates?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 11% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 17% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

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

With this in mind, we understand why Rama Phosphates' P/S is lower than most of its industry peers. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does Rama Phosphates' P/S Mean For Investors?

Rama Phosphates' stock price has surged recently, but its but its P/S still remains modest. 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.

Our examination of Rama Phosphates confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. If recent medium-term revenue trends continue, it's hard to see the share price moving strongly in either direction in the near future under these circumstances.

It is also worth noting that we have found 3 warning signs for Rama Phosphates (2 are a bit concerning!) that you need to take into consideration.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.