Why Investors Shouldn't Be Surprised By Abu Dhabi National Company for Building Materials PJSC's (ADX:BILDCO) 26% Share Price Surge

Abu Dhabi National Company for Building Materials PJSC (ADX:BILDCO) shares have continued their recent momentum with a 26% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 32% in the last year.

Since its price has surged higher, when almost half of the companies in the United Arab Emirates' Basic Materials industry have price-to-sales ratios (or "P/S") below 2.1x, you may consider Abu Dhabi National Company for Building Materials PJSC as a stock probably not worth researching with its 2.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Abu Dhabi National Company for Building Materials PJSC

How Abu Dhabi National Company for Building Materials PJSC Has Been Performing

With revenue growth that's exceedingly strong of late, Abu Dhabi National Company for Building Materials PJSC has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Abu Dhabi National Company for Building Materials PJSC, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Abu Dhabi National Company for Building Materials PJSC?

The only time you'd be truly comfortable seeing a P/S as high as Abu Dhabi National Company for Building Materials PJSC's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 65% gain to the company's top line. As a result, it also grew revenue by 27% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

In contrast to the company, the rest of the industry is expected to decline by 2.2% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

With this information, we can see why Abu Dhabi National Company for Building Materials PJSC is trading at a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

The Bottom Line On Abu Dhabi National Company for Building Materials PJSC's P/S

Abu Dhabi National Company for Building Materials PJSC shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As detailed previously, the strength of Abu Dhabi National Company for Building Materials PJSC's recent revenue trends over the medium-term relative to a declining industry is part of the reason why it trades at a higher P/S than its industry counterparts. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Otherwise, it's hard to see the share price falling strongly in the near future if its revenue performance persists.

You need to take note of risks, for example - Abu Dhabi National Company for Building Materials PJSC has 2 warning signs (and 1 which is significant) we think you should know about.

If these risks are making you reconsider your opinion on Abu Dhabi National Company for Building Materials PJSC, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.