Investors Still Aren't Entirely Convinced By SPML Infra Limited's (NSE:SPMLINFRA) Revenues Despite 42% Price Jump

Despite an already strong run, SPML Infra Limited (NSE:SPMLINFRA) shares have been powering on, with a gain of 42% in the last thirty days. The last month tops off a massive increase of 224% in the last year.

In spite of the firm bounce in price, SPML Infra's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Construction industry in India, where around half of the companies have P/S ratios above 1.7x and even P/S above 4x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for SPML Infra

What Does SPML Infra's Recent Performance Look Like?

Recent times have been quite advantageous for SPML Infra as its revenue has been rising very briskly. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. 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 out of favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on SPML Infra will help you shine a light on its historical performance.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, SPML Infra would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 56%. The latest three year period has also seen an excellent 35% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 11% shows it's about the same on an annualised basis.

With this information, we find it odd that SPML Infra is trading at a P/S lower than the industry. It may be that most investors are not convinced the company can maintain recent growth rates.

The Final Word

The latest share price surge wasn't enough to lift SPML Infra's P/S close to the industry median. 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.

Our examination of SPML Infra revealed its three-year revenue trends looking similar to current industry expectations hasn't given the P/S the boost we expected, given that it's lower than the wider industry P/S, When we see industry-like revenue growth but a lower than expected P/S, we assume potential risks are what might be placing downward pressure on the share price. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions should normally provide more support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with SPML Infra (at least 1 which can't be ignored), and understanding them should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.