Risks Still Elevated At These Prices As Shree Rama Multi-Tech Limited (NSE:SHREERAMA) Shares Dive 26%

To the annoyance of some shareholders, Shree Rama Multi-Tech Limited (NSE:SHREERAMA) shares are down a considerable 26% in the last month, which continues a horrid run for the company. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 146% in the last twelve months.

Even after such a large drop in price, you could still be forgiven for thinking Shree Rama Multi-Tech is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.7x, considering almost half the companies in India's Packaging industry have P/S ratios below 0.9x. 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.

See our latest analysis for Shree Rama Multi-Tech

What Does Shree Rama Multi-Tech's Recent Performance Look Like?

For example, consider that Shree Rama Multi-Tech's financial performance has been poor lately as its revenue has been in decline. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. If not, then existing shareholders may be quite nervous about the viability of the share price.

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 Shree Rama Multi-Tech's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Shree Rama Multi-Tech's is when the company's growth is on track to outshine the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 4.6%. Even so, admirably revenue has lifted 39% in aggregate from three years ago, notwithstanding the last 12 months. 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 the recent medium-term revenue trends against the industry's one-year growth forecast of 16% shows it's noticeably less attractive.

In light of this, it's alarming that Shree Rama Multi-Tech's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

There's still some elevation in Shree Rama Multi-Tech's P/S, even if the same can't be said for its share price recently. 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.

The fact that Shree Rama Multi-Tech currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - Shree Rama Multi-Tech has 2 warning signs (and 1 which is a bit concerning) 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.

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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.