Investors Still Waiting For A Pull Back In RHI Magnesita India Limited (NSE:RHIM)

When close to half the companies in the Basic Materials industry in India have price-to-sales ratios (or "P/S") below 1.9x, you may consider RHI Magnesita India Limited (NSE:RHIM) as a stock to potentially avoid with its 3.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

View our latest analysis for RHI Magnesita India

How Has RHI Magnesita India Performed Recently?

With revenue growth that's superior to most other companies of late, RHI Magnesita India has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is RHI Magnesita India's Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like RHI Magnesita India's to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 39% last year. Pleasingly, revenue has also lifted 176% in aggregate from three years ago, thanks to the last 12 months of growth. 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 13% per annum during the coming three years according to the only analyst following the company. With the industry only predicted to deliver 2.1% per year, the company is positioned for a stronger revenue result.

With this information, we can see why RHI Magnesita India is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does RHI Magnesita India's P/S Mean For Investors?

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.

Our look into RHI Magnesita India shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

And what about other risks? Every company has them, and we've spotted 1 warning sign for RHI Magnesita India you should know about.

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.

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.

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