Walchandnagar Industries Limited's (NSE:WALCHANNAG) 63% Price Boost Is Out Of Tune With Revenues

Walchandnagar Industries Limited (NSE:WALCHANNAG) shareholders have had their patience rewarded with a 63% share price jump in the last month. The last month tops off a massive increase of 291% in the last year.

Since its price has surged higher, when almost half of the companies in India's Machinery industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Walchandnagar Industries as a stock not worth researching with its 6.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Walchandnagar Industries

What Does Walchandnagar Industries' Recent Performance Look Like?

For example, consider that Walchandnagar Industries' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. 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 Walchandnagar Industries' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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

Retrospectively, the last year delivered a frustrating 6.1% decrease to the company's top line. As a result, revenue from three years ago have also fallen 7.2% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 14% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's alarming that Walchandnagar Industries' P/S sits above the majority of other companies. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What We Can Learn From Walchandnagar Industries' P/S?

Walchandnagar Industries' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

We've established that Walchandnagar Industries currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. When we see revenue heading backwards and underperforming the industry forecasts, we feel the possibility of the share price declining is very real, bringing the P/S back into the realm of reasonability. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Walchandnagar Industries that you should be aware of.

If these risks are making you reconsider your opinion on Walchandnagar Industries, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com