Further Upside For Zuari Agro Chemicals Limited (NSE:ZUARI) Shares Could Introduce Price Risks After 31% Bounce

The Zuari Agro Chemicals Limited (NSE:ZUARI) share price has done very well over the last month, posting an excellent gain of 31%. The last 30 days bring the annual gain to a very sharp 56%.

In spite of the firm bounce in price, Zuari Agro Chemicals' price-to-sales (or "P/S") ratio of 0.2x might still make it look like a buy right now compared to the Chemicals industry in India, where around half of the companies have P/S ratios above 1.6x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Zuari Agro Chemicals

What Does Zuari Agro Chemicals' P/S Mean For Shareholders?

Revenue has risen at a steady rate over the last year for Zuari Agro Chemicals, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to degrade, which has repressed the P/S. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Although there are no analyst estimates available for Zuari Agro Chemicals, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

Zuari Agro Chemicals' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 4.8%. Pleasingly, revenue has also lifted 99% 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 14% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that Zuari Agro Chemicals' P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

What Does Zuari Agro Chemicals' P/S Mean For Investors?

The latest share price surge wasn't enough to lift Zuari Agro Chemicals' P/S close to the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of Zuari Agro Chemicals 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. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Zuari Agro Chemicals (1 doesn't sit too well with us) you should be aware of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.

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