Schneider Electric Infrastructure Limited's (NSE:SCHNEIDER) Popularity With Investors Is Under Threat From Overpricing

When close to half the companies in the Electrical industry in India have price-to-sales ratios (or "P/S") below 3.2x, you may consider Schneider Electric Infrastructure Limited (NSE:SCHNEIDER) as a stock to avoid entirely with its 6.9x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Schneider Electric Infrastructure

How Has Schneider Electric Infrastructure Performed Recently?

With revenue growth that's inferior to most other companies of late, Schneider Electric Infrastructure has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Schneider Electric Infrastructure.

Is There Enough Revenue Growth Forecasted For Schneider Electric Infrastructure?

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

If we review the last year of revenue growth, the company posted a terrific increase of 22%. Pleasingly, revenue has also lifted 84% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 27% as estimated by the only analyst watching the company. That's shaping up to be materially lower than the 33% growth forecast for the broader industry.

In light of this, it's alarming that Schneider Electric Infrastructure's P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. 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.

The Final Word

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.

It comes as a surprise to see Schneider Electric Infrastructure trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

Plus, you should also learn about this 1 warning sign we've spotted with Schneider Electric Infrastructure.

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.