Sundaram-Clayton Limited's (NSE:SUNCLAY) 28% Price Boost Is Out Of Tune With Revenues

The Sundaram-Clayton Limited (NSE:SUNCLAY) share price has done very well over the last month, posting an excellent gain of 28%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Following the firm bounce in price, when almost half of the companies in India's Auto Components industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Sundaram-Clayton as a stock probably not worth researching with its 2.7x 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 Sundaram-Clayton

How Has Sundaram-Clayton Performed Recently?

For example, consider that Sundaram-Clayton's financial performance has been poor lately as its revenue has been in decline. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. If not, then existing shareholders may be quite nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Sundaram-Clayton will help you shine a light on its historical performance.

How Is Sundaram-Clayton's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Sundaram-Clayton's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 30% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 28% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 11% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Sundaram-Clayton's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Sundaram-Clayton's P/S

The large bounce in Sundaram-Clayton's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Sundaram-Clayton revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for Sundaram-Clayton that you should be aware of.

If you're unsure about the strength of Sundaram-Clayton'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