After Leaping 26% Transformers and Rectifiers (India) Limited (NSE:TARIL) Shares Are Not Flying Under The Radar

Transformers and Rectifiers (India) Limited (NSE:TARIL) shareholders are no doubt pleased to see that the share price has bounced 26% in the last month, although it is still struggling to make up recently lost ground. The annual gain comes to 184% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in India's Electrical industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Transformers and Rectifiers (India) as a stock to avoid entirely with its 7.8x 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 Transformers and Rectifiers (India)

How Transformers and Rectifiers (India) Has Been Performing

Transformers and Rectifiers (India) certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Transformers and Rectifiers (India) will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

Transformers and Rectifiers (India)'s 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, we see that the company grew revenue by an impressive 54% last year. Pleasingly, revenue has also lifted 68% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 69% as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 31% growth forecast for the broader industry.

In light of this, it's understandable that Transformers and Rectifiers (India)'s P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Transformers and Rectifiers (India)'s P/S Mean For Investors?

Transformers and Rectifiers (India)'s P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our look into Transformers and Rectifiers (India) shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Transformers and Rectifiers (India) you should be aware of.

If you're unsure about the strength of Transformers and Rectifiers (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.