Benign Growth For Dredging Corporation of India Limited (NSE:DREDGECORP) Underpins Stock's 28% Plummet

Dredging Corporation of India Limited (NSE:DREDGECORP) shares have retraced a considerable 28% in the last month, reversing a fair amount of their solid recent performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 179%.

In spite of the heavy fall in price, Dredging Corporation of India may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 3x, since almost half of all companies in the Infrastructure industry in India have P/S ratios greater than 4.2x and even P/S higher than 11x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for Dredging Corporation of India

How Dredging Corporation of India Has Been Performing

For example, consider that Dredging Corporation of India's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. Those who are bullish on Dredging Corporation of India will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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

How Is Dredging Corporation of India's Revenue Growth Trending?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Dredging Corporation of India's to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 19%. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 24% in total. So we can start by confirming that the company has generally done a good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 11% shows it's noticeably less attractive.

With this information, we can see why Dredging Corporation of India is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What We Can Learn From Dredging Corporation of India's P/S?

Dredging Corporation of India's recently weak share price has pulled its P/S back below other Infrastructure companies. 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 Dredging Corporation of India revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

You should always think about risks. Case in point, we've spotted 3 warning signs for Dredging Corporation of India you should be aware of, and 2 of them don't sit too well with us.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

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