The Market Lifts Rane Engine Valve Limited (NSE:RANEENGINE) Shares 29% But It Can Do More

Despite an already strong run, Rane Engine Valve Limited (NSE:RANEENGINE) shares have been powering on, with a gain of 29% in the last thirty days. The last 30 days bring the annual gain to a very sharp 97%.

Even after such a large jump in price, given about half the companies operating in India's Auto Components industry have price-to-sales ratios (or "P/S") above 1.5x, you may still consider Rane Engine Valve as an attractive investment with its 0.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Rane Engine Valve

What Does Rane Engine Valve's P/S Mean For Shareholders?

Rane Engine Valve has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. Those who are bullish on Rane Engine Valve will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Is There Any Revenue Growth Forecasted For Rane Engine Valve?

The only time you'd be truly comfortable seeing a P/S as low as Rane Engine Valve's is when the company's growth is on track to lag the industry.

Taking a look back first, we see that the company grew revenue by an impressive 21% last year. Pleasingly, revenue has also lifted 99% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 11%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that Rane Engine Valve is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Final Word

The latest share price surge wasn't enough to lift Rane Engine Valve's P/S close to the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We're very surprised to see Rane Engine Valve currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. 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.

It is also worth noting that we have found 4 warning signs for Rane Engine Valve (1 is potentially serious!) that you need to take into consideration.

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.