JBM Auto Limited (NSE:JBMA) Looks Just Right With A 30% Price Jump

JBM Auto Limited (NSE:JBMA) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The annual gain comes to 211% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in India's Auto Components industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider JBM Auto as a stock to avoid entirely with its 4.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for JBM Auto

How JBM Auto Has Been Performing

Recent times haven't been great for JBM Auto as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

There's an inherent assumption that a company should far outperform the industry for P/S ratios like JBM Auto's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 9.3%. The latest three year period has also seen an excellent 161% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 66% over the next year. With the industry only predicted to deliver 12%, the company is positioned for a stronger revenue result.

With this information, we can see why JBM Auto is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

Shares in JBM Auto have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

We've established that JBM Auto maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Auto Components industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for JBM Auto (1 can't be ignored) you should be aware of.

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.