Sobha Limited's (NSE:SOBHA) Prospects Need A Boost To Lift Shares

With a price-to-sales (or "P/S") ratio of 3.7x Sobha Limited (NSE:SOBHA) may be sending bullish signals at the moment, given that almost half of all the Real Estate companies in India have P/S ratios greater than 6.3x and even P/S higher than 16x are not unusual. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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View our latest analysis for Sobha

What Does Sobha's P/S Mean For Shareholders?

There hasn't been much to differentiate Sobha's and the industry's revenue growth lately. One possibility is that the P/S ratio is low because investors think this modest revenue performance may begin to slide. If not, then existing shareholders have reason to be optimistic about the future direction of the share price.

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Is There Any Revenue Growth Forecasted For Sobha?

The only time you'd be truly comfortable seeing a P/S as low as Sobha's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 50% last year. The latest three year period has also seen an excellent 52% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 21% over the next year. Meanwhile, the rest of the industry is forecast to expand by 36%, which is noticeably more attractive.

With this in consideration, its clear as to why Sobha's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

What We Can Learn From Sobha's P/S?

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Sobha's analyst forecasts revealed that its inferior revenue outlook is contributing to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. The company will need a change of fortune to justify the P/S rising higher in the future.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for Sobha with six simple checks.

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.