Shakti Pumps (India) Limited (NSE:SHAKTIPUMP) Shares Slammed 25% But Getting In Cheap Might Be Difficult Regardless

Shakti Pumps (India) Limited (NSE:SHAKTIPUMP) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 264% in the last twelve months.

In spite of the heavy fall in price, when almost half of the companies in India's Machinery industry have price-to-sales ratios (or "P/S") below 2.6x, you may still consider Shakti Pumps (India) as a stock probably not worth researching with its 4.4x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for Shakti Pumps (India)

What Does Shakti Pumps (India)'s P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Shakti Pumps (India) has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Shakti Pumps (India)'s earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Shakti Pumps (India)'s is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered an exceptional 161% gain to the company's top line. Pleasingly, revenue has also lifted 122% 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.

When compared to the industry's one-year growth forecast of 17%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in consideration, it's not hard to understand why Shakti Pumps (India)'s P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What Does Shakti Pumps (India)'s P/S Mean For Investors?

Despite the recent share price weakness, Shakti Pumps (India)'s P/S remains higher than most other companies in the industry. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Shakti Pumps (India) maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Shakti Pumps (India), and understanding should be part of your investment process.

If you're unsure about the strength of Shakti Pumps (India)'s 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.