Investors Appear Satisfied With Diamond Power Infrastructure Limited's (NSE:DIACABS) Prospects As Shares Rocket 46%

Diamond Power Infrastructure Limited (NSE:DIACABS) shares have continued their recent momentum with a 46% gain in the last month alone. Longer-term shareholders would be thankful for the recovery in the share price since it's now virtually flat for the year after the recent bounce.

Since its price has surged higher, you could be forgiven for thinking Diamond Power Infrastructure is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.6x, considering almost half the companies in India's Electrical industry have P/S ratios below 3.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Diamond Power Infrastructure

What Does Diamond Power Infrastructure's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Diamond Power Infrastructure has been doing very well. 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.

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

Is There Enough Revenue Growth Forecasted For Diamond Power Infrastructure?

The only time you'd be truly comfortable seeing a P/S as steep as Diamond Power Infrastructure's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an explosive gain to the company's top line. Spectacularly, three year revenue growth has also set the world alight, thanks to the last 12 months of incredible growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 30% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Diamond Power Infrastructure's P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From Diamond Power Infrastructure's P/S?

The strong share price surge has lead to Diamond Power Infrastructure's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Diamond Power Infrastructure revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Diamond Power Infrastructure you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.