Essen Speciality Films Limited's (NSE:ESFL) 25% Share Price Surge Not Quite Adding Up

Essen Speciality Films Limited (NSE:ESFL) shareholders would be excited to see that the share price has had a great month, posting a 25% gain and recovering from prior weakness. The last month tops off a massive increase of 268% in the last year.

Since its price has surged higher, you could be forgiven for thinking Essen Speciality Films is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.2x, considering almost half the companies in India's Consumer Durables industry have P/S ratios below 2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Essen Speciality Films

How Essen Speciality Films Has Been Performing

Revenue has risen firmly for Essen Speciality Films recently, which is pleasing to see. One possibility is that the P/S ratio is high because investors think this respectable revenue growth will be 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 Essen Speciality Films' earnings, revenue and cash flow.

How Is Essen Speciality Films' Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 22%. Pleasingly, revenue has also lifted 43% 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.

This is in contrast to the rest of the industry, which is expected to grow by 33% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's alarming that Essen Speciality Films' 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 good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

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

The fact that Essen Speciality Films currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. 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.

Before you settle on your opinion, we've discovered 2 warning signs for Essen Speciality Films that you should be aware of.

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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.