Voltas Limited's (NSE:VOLTAS) Popularity With Investors Is Clear

Voltas Limited's (NSE:VOLTAS) price-to-sales (or "P/S") ratio of 4.1x may not look like an appealing investment opportunity when you consider close to half the companies in the Construction industry in India have P/S ratios below 2.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Voltas

How Has Voltas Performed Recently?

Recent times have been advantageous for Voltas as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 Voltas will help you uncover what's on the horizon.

Is There Enough Revenue Growth Forecasted For Voltas?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Voltas' to be considered reasonable.

Retrospectively, the last year delivered an exceptional 39% gain to the company's top line. The latest three year period has also seen an excellent 75% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 13% per year over the next three years. That's shaping up to be materially higher than the 6.0% per year growth forecast for the broader industry.

In light of this, it's understandable that Voltas' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

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.

We've established that Voltas maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Construction industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You always need to take note of risks, for example - Voltas has 2 warning signs we think you should be aware of.

If these risks are making you reconsider your opinion on Voltas, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.