Optimistic Investors Push Anik Industries Limited (NSE:ANIKINDS) Shares Up 28% But Growth Is Lacking

Anik Industries Limited (NSE:ANIKINDS) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last month tops off a massive increase of 187% in the last year.

Following the firm bounce in price, given close to half the companies operating in India's Trade Distributors industry have price-to-sales ratios (or "P/S") below 1.4x, you may consider Anik Industries as a stock to potentially avoid 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.

See our latest analysis for Anik Industries

What Does Anik Industries' P/S Mean For Shareholders?

Recent times have been quite advantageous for Anik Industries as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. 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.

Taking a look back first, we see that the company grew revenue by an impressive 106% last year. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 49% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 3.2% shows it's an unpleasant look.

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 Key Takeaway

The large bounce in Anik Industries' shares has lifted the company's P/S handsomely. 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.

We've established that Anik Industries currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. 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.

It is also worth noting that we have found 2 warning signs for Anik Industries (1 is concerning!) that you need to take into consideration.

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.