Why Investors Shouldn't Be Surprised By Zuari Agro Chemicals Limited's (NSE:ZUARI) 25% Share Price Plunge

Zuari Agro Chemicals Limited (NSE:ZUARI) shares have had a horrible month, losing 25% after a relatively good period beforehand. Looking at the bigger picture, even after this poor month the stock is up 27% in the last year.

Since its price has dipped substantially, it would be understandable if you think Zuari Agro Chemicals is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.1x, considering almost half the companies in India's Chemicals industry have P/S ratios above 1.4x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

See our latest analysis for Zuari Agro Chemicals

What Does Zuari Agro Chemicals' Recent Performance Look Like?

The revenue growth achieved at Zuari Agro Chemicals over the last year would be more than acceptable for most companies. One possibility is that the P/S is low because investors think this respectable 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 Zuari Agro Chemicals' earnings, revenue and cash flow.

How Is Zuari Agro Chemicals' Revenue Growth Trending?

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.

Taking a look back first, we see that the company grew revenue by an impressive 23% last year. As a result, it also grew revenue by 22% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 12% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Zuari Agro Chemicals is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Zuari Agro Chemicals' P/S?

Zuari Agro Chemicals' recently weak share price has pulled its P/S back below other Chemicals companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

In line with expectations, Zuari Agro Chemicals maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You always need to take note of risks, for example - Zuari Agro Chemicals has 2 warning signs we think 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.