W.S. Industries (India) Limited (NSE:WSI) Stock Rockets 38% As Investors Are Less Pessimistic Than Expected

W.S. Industries (India) Limited (NSE:WSI) shareholders would be excited to see that the share price has had a great month, posting a 38% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 72%.

Although its price has surged higher, it's still not a stretch to say that W.S. Industries (India)'s price-to-sales (or "P/S") ratio of 3.2x right now seems quite "middle-of-the-road" compared to the Machinery industry in India, where the median P/S ratio is around 3.3x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

See our latest analysis for W.S. Industries (India)

What Does W.S. Industries (India)'s P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, W.S. Industries (India) has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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 W.S. Industries (India)'s earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For W.S. Industries (India)?

There's an inherent assumption that a company should be matching the industry for P/S ratios like W.S. Industries (India)'s to be considered reasonable.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. Although, its longer-term performance hasn't been anywhere near as strong with three-year revenue growth being relatively non-existent overall. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 13% shows it's noticeably less attractive.

With this in mind, we find it intriguing that W.S. Industries (India)'s P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On W.S. Industries (India)'s P/S

W.S. Industries (India)'s stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our examination of W.S. Industries (India) revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 3 warning signs with W.S. Industries (India) (at least 1 which is potentially serious), and understanding these should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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