Some Confidence Is Lacking In Inox Green Energy Services Limited (NSE:INOXGREEN) As Shares Slide 26%

Inox Green Energy Services Limited (NSE:INOXGREEN) shares have retraced a considerable 26% in the last month, reversing a fair amount of their solid recent performance. The last month has meant the stock is now only up 9.3% during the last year.

In spite of the heavy fall in price, given around half the companies in India's Construction industry have price-to-sales ratios (or "P/S") below 1.4x, you may still consider Inox Green Energy Services as a stock to avoid entirely with its 27.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for Inox Green Energy Services

What Does Inox Green Energy Services' P/S Mean For Shareholders?

Revenue has risen firmly for Inox Green Energy Services recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 Inox Green Energy Services, 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 Inox Green Energy Services?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Inox Green Energy Services' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 20%. As a result, it also grew revenue by 13% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 15% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that Inox Green Energy Services' 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 Bottom Line On Inox Green Energy Services' P/S

A significant share price dive has done very little to deflate Inox Green Energy Services' very lofty P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

The fact that Inox Green Energy Services currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Inox Green Energy Services that you need to be mindful of.

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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.