Stock Analysis

Why Investors Shouldn't Be Surprised By Servotech Power Systems Limited's (NSE:SERVOTECH) 26% Share Price Surge

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Servotech Power Systems Limited (NSE:SERVOTECH) shares have continued their recent momentum with a 26% gain in the last month alone. The last 30 days were the cherry on top of the stock's 448% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, when almost half of the companies in India's Electrical industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Servotech Power Systems as a stock not worth researching with its 6.5x 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.

See our latest analysis for Servotech Power Systems

NSEI:SERVOTECH Price to Sales Ratio vs Industry February 27th 2024

How Has Servotech Power Systems Performed Recently?

Servotech Power Systems certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Servotech Power Systems' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

Servotech Power Systems' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 61%. 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.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 32% shows it's noticeably more attractive.

In light of this, it's understandable that Servotech Power Systems' P/S sits above the majority of other companies. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

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

Shares in Servotech Power Systems 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.

It's no surprise that Servotech Power Systems can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Plus, you should also learn about these 2 warning signs we've spotted with Servotech Power Systems.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Servotech Power Systems is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.