S&S Power Switchgear Limited's (NSE:S&SPOWER) 33% Share Price Surge Not Quite Adding Up

S&S Power Switchgear Limited (NSE:S&SPOWER) shareholders are no doubt pleased to see that the share price has bounced 33% in the last month, although it is still struggling to make up recently lost ground. The last 30 days bring the annual gain to a very sharp 78%.

In spite of the firm bounce in price, there still wouldn't be many who think S&S Power Switchgear's price-to-sales (or "P/S") ratio of 2.7x is worth a mention when the median P/S in India's Electrical industry is similar at about 2.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for S&S Power Switchgear

How Has S&S Power Switchgear Performed Recently?

Revenue has risen at a steady rate over the last year for S&S Power Switchgear, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

How Is S&S Power Switchgear's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like S&S Power Switchgear's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a decent 6.4% gain to the company's revenues. Pleasingly, revenue has also lifted 37% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 31% shows it's noticeably less attractive.

With this in mind, we find it intriguing that S&S Power Switchgear's P/S is comparable to that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From S&S Power Switchgear's P/S?

S&S Power Switchgear's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that S&S Power Switchgear's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

You need to take note of risks, for example - S&S Power Switchgear has 3 warning signs (and 2 which are a bit concerning) we think you should know about.

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.