Lacklustre Performance Is Driving Mangalam Drugs & Organics Limited's (NSE:MANGALAM) 26% Price Drop

Unfortunately for some shareholders, the Mangalam Drugs & Organics Limited (NSE:MANGALAM) share price has dived 26% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 37% in that time.

Following the heavy fall in price, Mangalam Drugs & Organics may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.4x, since almost half of all companies in the Pharmaceuticals industry in India have P/S ratios greater than 2.3x and even P/S higher than 5x are not unusual. 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 Mangalam Drugs & Organics

How Mangalam Drugs & Organics Has Been Performing

For instance, Mangalam Drugs & Organics' receding revenue in recent times would have to be some food for thought. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

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

How Is Mangalam Drugs & Organics' Revenue Growth Trending?

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

Retrospectively, the last year delivered a frustrating 3.5% decrease to the company's top line. As a result, revenue from three years ago have also fallen 17% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 16% shows it's an unpleasant look.

In light of this, it's understandable that Mangalam Drugs & Organics' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What We Can Learn From Mangalam Drugs & Organics' P/S?

Mangalam Drugs & Organics' recently weak share price has pulled its P/S back below other Pharmaceuticals companies. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our examination of Mangalam Drugs & Organics confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You need to take note of risks, for example - Mangalam Drugs & Organics has 2 warning signs (and 1 which can't be ignored) 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.