Swan Energy Limited's (NSE:SWANENERGY) 27% Jump Shows Its Popularity With Investors

Swan Energy Limited (NSE:SWANENERGY) shares have continued their recent momentum with a 27% gain in the last month alone. Looking back a bit further, it's encouraging to see the stock is up 80% in the last year.

Since its price has surged higher, given around half the companies in India's Luxury industry have price-to-sales ratios (or "P/S") below 0.8x, you may consider Swan Energy as a stock to avoid entirely with its 4.8x P/S ratio. 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 Swan Energy

What Does Swan Energy's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Swan Energy has been doing very well. It seems that many are expecting the strong 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 Swan Energy, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is Swan Energy's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as steep as Swan Energy's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an explosive gain to the company's top line. The amazing performance means it was also able to deliver huge revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Comparing that to the industry, which is only predicted to deliver 12% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we can see why Swan Energy is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Bottom Line On Swan Energy's P/S

The strong share price surge has lead to Swan Energy's P/S soaring as well. 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.

We've established that Swan Energy maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Swan Energy, and understanding them should be part of your investment process.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.