Revenues Not Telling The Story For Paras Defence and Space Technologies Limited (NSE:PARAS) After Shares Rise 40%

Paras Defence and Space Technologies Limited (NSE:PARAS) shareholders would be excited to see that the share price has had a great month, posting a 40% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 84%.

Following the firm bounce in price, you could be forgiven for thinking Paras Defence and Space Technologies is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16x, considering almost half the companies in India's Aerospace & Defense industry have P/S ratios below 9.6x. 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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Check out our latest analysis for Paras Defence and Space Technologies

What Does Paras Defence and Space Technologies' P/S Mean For Shareholders?

Recent times have been quite advantageous for Paras Defence and Space Technologies as its revenue has been rising very briskly. 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Paras Defence and Space Technologies will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Paras Defence and Space Technologies?

In order to justify its P/S ratio, Paras Defence and Space Technologies would need to produce outstanding growth that's well in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 41% last year. Pleasingly, revenue has also lifted 63% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 23% 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 Paras Defence and Space Technologies' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates 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 recent growth rates.

The Key Takeaway

Shares in Paras Defence and Space Technologies have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

The fact that Paras Defence and Space Technologies 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It is also worth noting that we have found 1 warning sign for Paras Defence and Space Technologies that you need to take into consideration.

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.