Revenues Not Telling The Story For Multi Commodity Exchange of India Limited (NSE:MCX) After Shares Rise 28%

Despite an already strong run, Multi Commodity Exchange of India Limited (NSE:MCX) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 117% in the last year.

Since its price has surged higher, Multi Commodity Exchange of India's price-to-sales (or "P/S") ratio of 35x might make it look like a strong sell right now compared to other companies in the Capital Markets industry in India, where around half of the companies have P/S ratios below 7.5x and even P/S below 2x are quite common. 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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See our latest analysis for Multi Commodity Exchange of India

How Multi Commodity Exchange of India Has Been Performing

Multi Commodity Exchange of India could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Multi Commodity Exchange of India's future stacks up against the industry? In that case, our free report is a great place to start.

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

Multi Commodity Exchange of India's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 61%. Pleasingly, revenue has also lifted 183% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 14% per annum as estimated by the eight analysts watching the company. That's shaping up to be similar to the 14% each year growth forecast for the broader industry.

With this in consideration, we find it intriguing that Multi Commodity Exchange of India's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Key Takeaway

Shares in Multi Commodity Exchange of India have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Given Multi Commodity Exchange of India's future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Before you take the next step, you should know about the 1 warning sign for Multi Commodity Exchange of India that we have uncovered.

If these risks are making you reconsider your opinion on Multi Commodity Exchange of India, 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.