Investors Appear Satisfied With Suzlon Energy Limited's (NSE:SUZLON) Prospects As Shares Rocket 25%

The Suzlon Energy Limited (NSE:SUZLON) share price has done very well over the last month, posting an excellent gain of 25%. The last month tops off a massive increase of 273% in the last year.

Since its price has surged higher, when almost half of the companies in India's Electrical industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider Suzlon Energy as a stock not worth researching with its 10.3x 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.

View our latest analysis for Suzlon Energy

What Does Suzlon Energy's P/S Mean For Shareholders?

Recent times haven't been great for Suzlon Energy as its revenue has been rising slower than most other companies. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Suzlon Energy's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Suzlon Energy's Revenue Growth Trending?

In order to justify its P/S ratio, Suzlon Energy would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Pleasingly, revenue has also lifted 99% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 40% each year during the coming three years according to the four analysts following the company. That's shaping up to be materially higher than the 22% per annum growth forecast for the broader industry.

With this information, we can see why Suzlon Energy is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to Suzlon Energy's P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

As we suspected, our examination of Suzlon Energy's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware Suzlon Energy is showing 3 warning signs in our investment analysis, and 1 of those is potentially serious.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.