Why We're Not Concerned About RHI Magnesita India Limited's (NSE:RHIM) Share Price

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 2.9x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

Check out our latest analysis for RHI Magnesita India

How Has RHI Magnesita India Performed Recently?

Recent revenue growth for RHI Magnesita India has been in line with the industry. One possibility is that the P/S ratio is high because investors think this modest revenue performance will accelerate. 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.

Retrospectively, the last year delivered a decent 5.0% gain to the company's revenues. This was backed up an excellent period prior to see revenue up by 119% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth will be highly resilient over the next year growing by 13%. With the rest of the industry predicted to shrink by 3.8%, that would be a fantastic result.

With this in consideration, we understand why RHI Magnesita India's P/S is a cut above its industry peers. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader industry going backwards.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We can see that RHI Magnesita India maintains its high P/S on the strength of its forecast growth potentially beating a struggling industry, as expected. At this stage investors feel the potential for a deterioration in revenue is remote enough to justify paying a premium in the form of a high P/S. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Although, if the company's prospects don't change they will continue to provide strong support to the share price.

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

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).

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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.