Risks Still Elevated At These Prices As Sify Technologies Limited (NASDAQ:SIFY) Shares Dive 27%

The Sify Technologies Limited (NASDAQ:SIFY) share price has softened a substantial 27% over the previous 30 days, handing back much of the gains the stock has made lately. The good news is that in the last year, the stock has shone bright like a diamond, gaining 232%.

Although its price has dipped substantially, you could still be forgiven for feeling indifferent about Sify Technologies' P/S ratio of 1.7x, since the median price-to-sales (or "P/S") ratio for the Telecom industry in the United States is also close to 1.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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See our latest analysis for Sify Technologies

What Does Sify Technologies' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Sify Technologies has been relatively sluggish. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Sify Technologies' future stacks up against the industry? In that case, our free report is a great place to start.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Sify Technologies would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a decent 9.1% gain to the company's revenues. Pleasingly, revenue has also lifted 42% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 53% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 203%, which is noticeably more attractive.

With this information, we find it interesting that Sify Technologies is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Sify Technologies' P/S

Following Sify Technologies' share price tumble, its P/S is just clinging on to the industry median P/S. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

When you consider that Sify Technologies' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

You should always think about risks. Case in point, we've spotted 2 warning signs for Sify Technologies you should be aware of, and 1 of them is potentially serious.

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.