Sagardeep Alloys Limited (NSE:SAGARDEEP) Stock's 27% Dive Might Signal An Opportunity But It Requires Some Scrutiny

Sagardeep Alloys Limited (NSE:SAGARDEEP) shares have had a horrible month, losing 27% after a relatively good period beforehand. Indeed, the recent drop has reduced its annual gain to a relatively sedate 6.2% over the last twelve months.

In spite of the heavy fall in price, considering around half the companies operating in India's Metals and Mining industry have price-to-sales ratios (or "P/S") above 1.1x, you may still consider Sagardeep Alloys as an solid investment opportunity with its 0.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Sagardeep Alloys

What Does Sagardeep Alloys' Recent Performance Look Like?

Sagardeep Alloys has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 Sagardeep Alloys' earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Sagardeep Alloys?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Sagardeep Alloys' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 5.0%. Pleasingly, revenue has also lifted 72% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

This is in contrast to the rest of the industry, which is expected to grow by 8.1% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we find it odd that Sagardeep Alloys is trading at a P/S lower than the industry. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Sagardeep Alloys' recently weak share price has pulled its P/S back below other Metals and Mining companies. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Sagardeep Alloys revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

You need to take note of risks, for example - Sagardeep Alloys has 5 warning signs (and 3 which are a bit unpleasant) we think you should know about.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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.