Further Upside For Force Motors Limited (NSE:FORCEMOT) Shares Could Introduce Price Risks After 48% Bounce

Force Motors Limited (NSE:FORCEMOT) shareholders would be excited to see that the share price has had a great month, posting a 48% gain and recovering from prior weakness. This latest share price bounce rounds out a remarkable 441% gain over the last twelve months.

Although its price has surged higher, Force Motors' price-to-sales (or "P/S") ratio of 1.3x might still make it look like a buy right now compared to the Machinery industry in India, where around half of the companies have P/S ratios above 2.4x and even P/S above 5x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Force Motors

What Does Force Motors' Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Force Motors has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. Those who are bullish on Force Motors will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 Force Motors' earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Force Motors' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 46% last year. Pleasingly, revenue has also lifted 221% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 13%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in mind, we find it intriguing that Force Motors' P/S isn't as high compared to that of its industry peers. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On Force Motors' P/S

Despite Force Motors' share price climbing recently, its P/S still lags most other companies. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Force Motors revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Force Motors (1 is a bit concerning!) that you need to be mindful of.

If you're unsure about the strength of Force Motors' 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.