A Piece Of The Puzzle Missing From PPAP Automotive Limited's (NSE:PPAP) 29% Share Price Climb

The PPAP Automotive Limited (NSE:PPAP) share price has done very well over the last month, posting an excellent gain of 29%. Taking a wider view, although not as strong as the last month, the full year gain of 15% is also fairly reasonable.

In spite of the firm bounce in price, it would still be understandable if you think PPAP Automotive is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.6x, considering almost half the companies in India's Auto Components industry have P/S ratios above 1.5x. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for PPAP Automotive

How PPAP Automotive Has Been Performing

PPAP Automotive has been doing a decent job lately as it's been growing revenue at a reasonable pace. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Although there are no analyst estimates available for PPAP Automotive, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is PPAP Automotive's Revenue Growth Trending?

PPAP Automotive's P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 5.9%. The latest three year period has also seen an excellent 31% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

When compared to the industry's one-year growth forecast of 7.5%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's peculiar that PPAP Automotive's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

PPAP Automotive's stock price has surged recently, but its but its P/S still remains modest. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of PPAP Automotive revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

Having said that, be aware PPAP Automotive is showing 4 warning signs in our investment analysis, and 2 of those can't be ignored.

If these risks are making you reconsider your opinion on PPAP Automotive, 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.