Investors Appear Satisfied With Lloyds Engineering Works Limited's (NSE:LLOYDSENGG) Prospects As Shares Rocket 33%

Lloyds Engineering Works Limited (NSE:LLOYDSENGG) shareholders have had their patience rewarded with a 33% share price jump in the last month. Notwithstanding the latest gain, the annual share price return of 7.2% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking Lloyds Engineering Works is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 14x, considering almost half the companies in India's Machinery industry have P/S ratios below 2.8x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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See our latest analysis for Lloyds Engineering Works

How Lloyds Engineering Works Has Been Performing

With revenue growth that's exceedingly strong of late, Lloyds Engineering Works has been doing very well. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for 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 Lloyds Engineering Works, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Lloyds Engineering Works' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 35% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous 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 information, we can see why Lloyds Engineering Works is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Lloyds Engineering Works' P/S

Lloyds Engineering Works' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It's no surprise that Lloyds Engineering Works can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

You need to take note of risks, for example - Lloyds Engineering Works has 2 warning signs (and 1 which is potentially serious) we think you should know about.

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.