Umang Dairies Limited's (NSE:UMANGDAIRY) 32% Share Price Surge Not Quite Adding Up

Umang Dairies Limited (NSE:UMANGDAIRY) shares have had a really impressive month, gaining 32% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.

Although its price has surged higher, there still wouldn't be many who think Umang Dairies' price-to-sales (or "P/S") ratio of 1.1x is worth a mention when the median P/S in India's Food industry is similar at about 1.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Umang Dairies

How Has Umang Dairies Performed Recently?

For instance, Umang Dairies' receding revenue in recent times would have to be some food for thought. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If not, then existing shareholders may be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Umang Dairies will help you shine a light on its historical performance.

Do Revenue Forecasts Match The P/S Ratio?

In order to justify its P/S ratio, Umang Dairies would need to produce growth that's similar to the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 21%. Regardless, revenue has managed to lift by a handy 13% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 12% shows it's noticeably less attractive.

With this information, we find it interesting that Umang Dairies is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On Umang Dairies' P/S

Umang Dairies' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Umang Dairies' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. 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.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for Umang Dairies (2 are a bit concerning) you should be aware of.

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.