Why We're Not Concerned About KRN Heat Exchanger and Refrigeration Limited's (NSE:KRN) Share Price

When close to half the companies in the Building industry in India have price-to-sales ratios (or "P/S") below 1.4x, you may consider KRN Heat Exchanger and Refrigeration Limited (NSE:KRN) as a stock to avoid entirely with its 11.8x 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 KRN Heat Exchanger and Refrigeration

What Does KRN Heat Exchanger and Refrigeration's Recent Performance Look Like?

KRN Heat Exchanger and Refrigeration certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is KRN Heat Exchanger and Refrigeration's Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like KRN Heat Exchanger and Refrigeration's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 39% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 175% in total over the last three years. 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 12% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that KRN Heat Exchanger and Refrigeration'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.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that KRN Heat Exchanger and Refrigeration maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

You should always think about risks. Case in point, we've spotted 1 warning sign for KRN Heat Exchanger and Refrigeration 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.