Why Investors Shouldn't Be Surprised By eMudhra Limited's (NSE:EMUDHRA) 29% Share Price Surge

eMudhra Limited (NSE:EMUDHRA) shares have continued their recent momentum with a 29% gain in the last month alone. The last month tops off a massive increase of 215% in the last year.

Following the firm bounce in price, eMudhra may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 17.9x, when you consider almost half of the companies in the Professional Services industry in India have P/S ratios under 3.3x and even P/S lower than 1x aren't out of the ordinary. 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 eMudhra

How eMudhra Has Been Performing

Recent times have been advantageous for eMudhra as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on eMudhra.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 61% gain to the company's top line. Pleasingly, revenue has also lifted 166% in aggregate from three years ago, thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the sole analyst covering the company suggest revenue should grow by 39% over the next year. With the industry only predicted to deliver 20%, the company is positioned for a stronger revenue result.

In light of this, it's understandable that eMudhra's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Shares in eMudhra have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 eMudhra maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Professional Services 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.

We don't want to rain on the parade too much, but we did also find 2 warning signs for eMudhra that you need to be mindful of.

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