IL&FS Engineering and Construction Company Limited (NSE:IL&FSENGG) Stock Rockets 28% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, IL&FS Engineering and Construction Company Limited (NSE:IL&FSENGG) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 175% following the latest surge, making investors sit up and take notice.

In spite of the firm bounce in price, it's still not a stretch to say that IL&FS Engineering and Construction's price-to-sales (or "P/S") ratio of 2.3x right now seems quite "middle-of-the-road" compared to the Construction industry in India, where the median P/S ratio is around 2.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for IL&FS Engineering and Construction

How Has IL&FS Engineering and Construction Performed Recently?

IL&FS Engineering and Construction has been doing a decent job lately as it's been growing revenue at a reasonable pace. Perhaps the expectation moving forward is that the revenue growth will track in line with the wider industry for the near term, which has kept the P/S subdued. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

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 IL&FS Engineering and Construction's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

There's an inherent assumption that a company should be matching the industry for P/S ratios like IL&FS Engineering and Construction's to be considered reasonable.

Taking a look back first, we see that the company managed to grow revenues by a handy 4.3% last year. However, this wasn't enough as the latest three year period has seen an unpleasant 39% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Comparing that to the industry, which is predicted to deliver 11% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that IL&FS Engineering and Construction's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does IL&FS Engineering and Construction's P/S Mean For Investors?

IL&FS Engineering and Construction appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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 find it unexpected that IL&FS Engineering and Construction trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 2 warning signs for IL&FS Engineering and Construction (1 is a bit unpleasant!) that you need to take into consideration.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.