Even With A 47% Surge, Cautious Investors Are Not Rewarding Atul Auto Limited's (NSE:ATULAUTO) Performance Completely

Atul Auto Limited (NSE:ATULAUTO) shareholders have had their patience rewarded with a 47% share price jump in the last month. The last month tops off a massive increase of 119% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Atul Auto's P/S ratio of 4x, since the median price-to-sales (or "P/S") ratio for the Auto industry in India is also close to 3.3x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Atul Auto

How Atul Auto Has Been Performing

Recent times haven't been great for Atul Auto as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Atul Auto.

What Are Revenue Growth Metrics Telling Us About The P/S?

The only time you'd be comfortable seeing a P/S like Atul Auto's is when the company's growth is tracking the industry closely.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.4% last year. The latest three year period has also seen an excellent 79% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 140% per year during the coming three years according to the only analyst following the company. Meanwhile, the rest of the industry is forecast to only expand by 8.4% each year, which is noticeably less attractive.

With this in consideration, we find it intriguing that Atul Auto's P/S is closely matching its industry peers. It may be that most investors aren't convinced the company can achieve future growth expectations.

What We Can Learn From Atul Auto's P/S?

Atul Auto's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Despite enticing revenue growth figures that outpace the industry, Atul Auto's P/S isn't quite what we'd expect. When we see a strong revenue outlook, with growth outpacing the industry, we can only assume potential uncertainty around these figures are what might be placing slight pressure on the P/S ratio. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Atul Auto, and understanding them should be part of your investment process.

If you're unsure about the strength of Atul Auto's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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