Improved Revenues Required Before Sadbhav Infrastructure Project Limited (NSE:SADBHIN) Stock's 30% Jump Looks Justified

Sadbhav Infrastructure Project Limited (NSE:SADBHIN) shares have had a really impressive month, gaining 30% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 13% in the last twelve months.

In spite of the firm bounce in price, Sadbhav Infrastructure Project may still be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.3x, since almost half of all companies in the Infrastructure industry in India have P/S ratios greater than 2.9x and even P/S higher than 8x are not unusual. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Sadbhav Infrastructure Project

How Sadbhav Infrastructure Project Has Been Performing

For example, consider that Sadbhav Infrastructure Project'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. 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 Sadbhav Infrastructure Project, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Sadbhav Infrastructure Project's Revenue Growth Trending?

In order to justify its P/S ratio, Sadbhav Infrastructure Project would need to produce anemic growth that's substantially trailing the industry.

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 9.6%. The last three years don't look nice either as the company has shrunk revenue by 27% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to grow by 7.1% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Sadbhav Infrastructure Project is trading at a P/S lower than the industry. 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.

The Bottom Line On Sadbhav Infrastructure Project's P/S

Even after such a strong price move, Sadbhav Infrastructure Project's P/S still trails the rest of the industry. 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.

Our examination of Sadbhav Infrastructure Project 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. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you take the next step, you should know about the 4 warning signs for Sadbhav Infrastructure Project (2 can't be ignored!) that we have uncovered.

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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.