Further Upside For GMR Power And Urban Infra Limited (NSE:GMRP&UI) Shares Could Introduce Price Risks After 25% Bounce

GMR Power And Urban Infra Limited (NSE:GMRP&UI) shares have continued their recent momentum with a 25% gain in the last month alone. The last 30 days were the cherry on top of the stock's 405% gain in the last year, which is nothing short of spectacular.

Although its price has surged higher, GMR Power And Urban Infra may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 1.2x, since almost half of all companies in the Construction industry in India have P/S ratios greater than 2x and even P/S higher than 5x are not unusual. 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 GMR Power And Urban Infra

What Does GMR Power And Urban Infra's P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at GMR Power And Urban Infra over the last year, which is not ideal at all. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on GMR Power And Urban Infra will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, GMR Power And Urban Infra would need to produce sluggish growth that's trailing the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 19%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 64% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Comparing that to the industry, which is only predicted to deliver 14% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it odd that GMR Power And Urban Infra is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Bottom Line On GMR Power And Urban Infra's P/S

Despite GMR Power And Urban Infra's share price climbing recently, its P/S still lags most other companies. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We're very surprised to see GMR Power And Urban Infra currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

You need to take note of risks, for example - GMR Power And Urban Infra has 3 warning signs (and 2 which are potentially serious) we think you should know about.

If you're unsure about the strength of GMR Power And Urban Infra'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