Hitachi Energy India Limited's (NSE:POWERINDIA) Shares Climb 27% But Its Business Is Yet to Catch Up

Hitachi Energy India Limited (NSE:POWERINDIA) shares have had a really impressive month, gaining 27% after a shaky period beforehand. The last month tops off a massive increase of 252% in the last year.

Following the firm bounce in price, Hitachi Energy India's price-to-sales (or "P/S") ratio of 11.1x might make it look like a strong sell right now compared to other companies in the Electrical industry in India, where around half of the companies have P/S ratios below 3.7x and even P/S below 1.5x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for Hitachi Energy India

How Hitachi Energy India Has Been Performing

Hitachi Energy India could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Hitachi Energy India will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Hitachi Energy India?

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

Taking a look back first, we see that the company grew revenue by an impressive 22% last year. The latest three year period has also seen an excellent 46% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 30% over the next year. Meanwhile, the rest of the industry is forecast to expand by 34%, which is noticeably more attractive.

With this information, we find it concerning that Hitachi Energy India is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

What Does Hitachi Energy India's P/S Mean For Investors?

Hitachi Energy India's P/S has grown nicely over the last month thanks to a handy boost in the share price. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've concluded that Hitachi Energy India currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Hitachi Energy India with six simple checks.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.