Further Upside For Cadsys (India) Limited (NSE:CADSYS) Shares Could Introduce Price Risks After 46% Bounce

Cadsys (India) Limited (NSE:CADSYS) shareholders would be excited to see that the share price has had a great month, posting a 46% gain and recovering from prior weakness. The last 30 days were the cherry on top of the stock's 620% gain in the last year, which is nothing short of spectacular.

Although its price has surged higher, Cadsys (India)'s price-to-sales (or "P/S") ratio of 1.1x might still make it look like a strong buy right now compared to the wider Professional Services industry in India, where around half of the companies have P/S ratios above 3.3x and even P/S above 9x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Cadsys (India)

What Does Cadsys (India)'s Recent Performance Look Like?

Recent times have been quite advantageous for Cadsys (India) as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. If that doesn't eventuate, then existing shareholders have reason to be quite optimistic about the future direction of the share price.

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 Cadsys (India)'s earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

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

Taking a look back first, we see that the company grew revenue by an impressive 67% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 20% shows it's noticeably more attractive.

With this in mind, we find it intriguing that Cadsys (India)'s P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

What We Can Learn From Cadsys (India)'s P/S?

Cadsys (India)'s recent share price jump still sees fails to bring its P/S alongside the industry median. 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 Cadsys (India) revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. Potential investors that are sceptical over continued revenue performance may be preventing the P/S ratio from matching previous strong performance. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Cadsys (India) (3 don't sit too well with us!) that you need to be mindful of.

If you're unsure about the strength of Cadsys (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.