Transformers and Rectifiers (India) Limited's (NSE:TARIL) Stock Retreats 26% But Revenues Haven't Escaped The Attention Of Investors

Transformers and Rectifiers (India) Limited (NSE:TARIL) shareholders won't be pleased to see that the share price has had a very rough month, dropping 26% and undoing the prior period's positive performance. The good news is that in the last year, the stock has shone bright like a diamond, gaining 150%.

Even after such a large drop in price, you could still be forgiven for thinking Transformers and Rectifiers (India) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.2x, considering almost half the companies in India's Electrical industry have P/S ratios below 3x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

Check out our latest analysis for Transformers and Rectifiers (India)

How Transformers and Rectifiers (India) Has Been Performing

With revenue growth that's superior to most other companies of late, Transformers and Rectifiers (India) has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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.

Is There Enough Revenue Growth Forecasted For Transformers and Rectifiers (India)?

The only time you'd be truly comfortable seeing a P/S as steep as Transformers and Rectifiers (India)'s is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 54% gain to the company's top line. 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.

Looking ahead now, revenue is anticipated to climb by 69% during the coming year according to the dual analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 32%, which is noticeably less attractive.

With this information, we can see why Transformers and Rectifiers (India) 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 Key Takeaway

A significant share price dive has done very little to deflate Transformers and Rectifiers (India)'s very lofty P/S. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

We've established that Transformers and Rectifiers (India) maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Electrical industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Transformers and Rectifiers (India) with six simple checks will allow you to discover any risks that could be an issue.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.