After Leaping 27% Zomato Limited (NSE:ZOMATO) Shares Are Not Flying Under The Radar

Despite an already strong run, Zomato Limited (NSE:ZOMATO) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 270% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, Zomato's price-to-sales (or "P/S") ratio of 16x might make it look like a strong sell right now compared to other companies in the Hospitality industry in India, where around half of the companies have P/S ratios below 4.5x and even P/S below 2x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

View our latest analysis for Zomato

How Has Zomato Performed Recently?

Recent times have been advantageous for Zomato 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Zomato will help you uncover what's on the horizon.

How Is Zomato's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 70% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 36% per annum during the coming three years according to the analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 31% per annum, which is noticeably less attractive.

With this in mind, it's not hard to understand why Zomato's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Zomato's P/S?

Shares in Zomato have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 Zomato maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Hospitality industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. 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 1 warning sign for Zomato that you need to be mindful of.

If you're unsure about the strength of Zomato'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.