Revenues Tell The Story For Tatva Chintan Pharma Chem Limited (NSE:TATVA)

When close to half the companies in the Chemicals industry in India have price-to-sales ratios (or "P/S") below 1.4x, you may consider Tatva Chintan Pharma Chem Limited (NSE:TATVA) as a stock to avoid entirely with its 4.2x 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 so lofty.

See our latest analysis for Tatva Chintan Pharma Chem

What Does Tatva Chintan Pharma Chem's P/S Mean For Shareholders?

Tatva Chintan Pharma Chem hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. If not, then existing shareholders may be extremely nervous about the viability of the share price.

Keen to find out how analysts think Tatva Chintan Pharma Chem's future stacks up against the industry? In that case, our free report is a great place to start.

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

Tatva Chintan Pharma Chem's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 11%. This means it has also seen a slide in revenue over the longer-term as revenue is down 16% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 26% over the next year. That's shaping up to be materially higher than the 14% growth forecast for the broader industry.

With this information, we can see why Tatva Chintan Pharma Chem 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 Tatva Chintan Pharma Chem's P/S Mean For Investors?

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Tatva Chintan Pharma Chem's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Tatva Chintan Pharma Chem is showing 2 warning signs in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on Tatva Chintan Pharma Chem, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.