Subdued Growth No Barrier To Swelect Energy Systems Limited (NSE:SWELECTES) With Shares Advancing 45%

Despite an already strong run, Swelect Energy Systems Limited (NSE:SWELECTES) shares have been powering on, with a gain of 45% in the last thirty days. The last month tops off a massive increase of 278% in the last year.

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 3.2x, you may consider Swelect Energy Systems as a stock not worth researching with its 5.9x 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 so lofty.

Check out our latest analysis for Swelect Energy Systems

What Does Swelect Energy Systems' P/S Mean For Shareholders?

For instance, Swelect Energy Systems' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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 Swelect Energy Systems' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Swelect Energy Systems?

Swelect Energy 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.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 24%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 47% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 30% shows it's noticeably less attractive.

In light of this, it's alarming that Swelect Energy Systems' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Swelect Energy Systems' P/S

The strong share price surge has lead to Swelect Energy Systems' 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.

The fact that Swelect Energy Systems currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Swelect Energy Systems (1 is potentially serious!) that you need to be mindful of.

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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