What Fiberweb (India) Limited's (NSE:FIBERWEB) 35% Share Price Gain Is Not Telling You

Fiberweb (India) Limited (NSE:FIBERWEB) shares have had a really impressive month, gaining 35% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 60%.

Since its price has surged higher, you could be forgiven for thinking Fiberweb (India) is a stock not worth researching with a price-to-sales ratios (or "P/S") of 1.8x, considering almost half the companies in India's Luxury industry have P/S ratios below 1.1x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Fiberweb (India)

What Does Fiberweb (India)'s P/S Mean For Shareholders?

Revenue has risen firmly for Fiberweb (India) recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

Although there are no analyst estimates available for Fiberweb (India), take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Fiberweb (India)'s is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 14%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 22% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

In contrast to the company, the rest of the industry is expected to grow by 23% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that Fiberweb (India)'s P/S exceeds that of its industry peers. 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.

The Bottom Line On Fiberweb (India)'s P/S

Fiberweb (India)'s P/S is on the rise since its shares have risen strongly. 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.

Our examination of Fiberweb (India) revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Fiberweb (India) (of which 1 is significant!) you should know about.

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