Revenues Tell The Story For Servotech Power Systems Limited (NSE:SERVOTECH) As Its Stock Soars 28%

Servotech Power Systems Limited (NSE:SERVOTECH) shareholders would be excited to see that the share price has had a great month, posting a 28% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 27%.

After such a large jump in price, Servotech Power Systems may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 6.5x, when you consider almost half of the companies in the Electrical industry in India have P/S ratios under 4x and even P/S lower than 1.6x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Servotech Power Systems

How Servotech Power Systems Has Been Performing

Revenue has risen firmly for Servotech Power Systems recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. 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 Servotech Power Systems will help you shine a light on its historical performance.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered an exceptional 27% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 32% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's understandable that Servotech Power Systems' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What Does Servotech Power Systems' P/S Mean For Investors?

The strong share price surge has lead to Servotech Power Systems' P/S soaring as well. 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.

We've established that Servotech Power Systems maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Servotech Power Systems is showing 2 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Servotech Power Systems' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.

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