Anik Industries Limited's (NSE:ANIKINDS) Shares Climb 37% But Its Business Is Yet to Catch Up

Anik Industries Limited (NSE:ANIKINDS) shares have continued their recent momentum with a 37% gain in the last month alone. The annual gain comes to 135% following the latest surge, making investors sit up and take notice.

After such a large jump in price, you could be forgiven for thinking Anik Industries is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.7x, considering almost half the companies in India's Trade Distributors industry have P/S ratios below 1.9x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Anik Industries

How Has Anik Industries Performed Recently?

Revenue has risen firmly for Anik Industries recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Anik Industries' earnings, revenue and cash flow.

How Is Anik Industries' Revenue Growth Trending?

In order to justify its P/S ratio, Anik Industries would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. Still, lamentably revenue has fallen 45% in aggregate from three years ago, which is disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 6.1% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

In light of this, it's alarming that Anik Industries' 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

The large bounce in Anik Industries' 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 Anik Industries revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Before you settle on your opinion, we've discovered 1 warning sign for Anik Industries that you should be aware of.

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

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.