Parsvnath Developers Limited (NSE:PARSVNATH) Stock Catapults 27% Though Its Price And Business Still Lag The Industry

Parsvnath Developers Limited (NSE:PARSVNATH) shares have continued their recent momentum with a 27% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 78%.

Even after such a large jump in price, Parsvnath Developers' price-to-sales (or "P/S") ratio of 1.2x might still make it look like a strong buy right now compared to the wider Real Estate industry in India, where around half of the companies have P/S ratios above 7.1x and even P/S above 17x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Parsvnath Developers

What Does Parsvnath Developers' P/S Mean For Shareholders?

For instance, Parsvnath Developers' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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 Parsvnath Developers, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Parsvnath Developers' Revenue Growth Trending?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Parsvnath Developers' to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 45%. The last three years don't look nice either as the company has shrunk revenue by 55% in aggregate. 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 40% shows it's an unpleasant look.

With this information, we are not surprised that Parsvnath Developers is trading at a P/S lower than the industry. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. 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 Parsvnath Developers' P/S?

Even after such a strong price move, Parsvnath Developers' P/S still trails the rest of the industry. 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.

As we suspected, our examination of Parsvnath Developers revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set 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. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

Plus, you should also learn about these 3 warning signs we've spotted with Parsvnath Developers (including 2 which are a bit unpleasant).

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).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.