Optimistic Investors Push Nila Infrastructures Limited (NSE:NILAINFRA) Shares Up 43% But Growth Is Lacking

Despite an already strong run, Nila Infrastructures Limited (NSE:NILAINFRA) shares have been powering on, with a gain of 43% in the last thirty days. The last month tops off a massive increase of 118% in the last year.

After such a large jump in price, given close to half the companies operating in India's Construction industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider Nila Infrastructures as a stock to potentially avoid with its 3.9x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Nila Infrastructures

How Has Nila Infrastructures Performed Recently?

Nila Infrastructures certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Nila Infrastructures' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Nila Infrastructures' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 54% gain to the company's top line. Despite this strong recent growth, it's still struggling to catch up as its three-year revenue frustratingly shrank by 20% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's an unpleasant look.

With this information, we find it concerning that Nila Infrastructures is trading at a P/S higher than the industry. 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. There's a very 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.

The Final Word

Nila Infrastructures shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Our examination of Nila Infrastructures revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Nila Infrastructures (1 is a bit concerning!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.