Andhra Cements Limited's (NSE:ACL) 27% Jump Shows Its Popularity With Investors

Despite an already strong run, Andhra Cements Limited (NSE:ACL) shares have been powering on, with a gain of 27% in the last thirty days. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 4.3% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking Andhra Cements is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.6x, considering almost half the companies in India's Basic Materials industry have P/S ratios below 1.7x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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Check out our latest analysis for Andhra Cements

What Does Andhra Cements' P/S Mean For Shareholders?

For instance, Andhra Cements' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Andhra Cements' earnings, revenue and cash flow.

How Is Andhra Cements' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Andhra Cements' to be considered reasonable.

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 2.5%. This has erased any of its gains during the last three years, with practically no change in revenue being achieved in total. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 1.6% shows it's a great look while it lasts.

With this information, we can see why Andhra Cements is trading at a high P/S compared to the industry. Investors are willing to pay more for a stock they hope will buck the trend of the broader industry going backwards. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

The Final Word

Andhra Cements shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

As detailed previously, the strength of Andhra Cements' recent revenue trends over the medium-term relative to a declining industry is part of the reason why it trades at a higher P/S than its industry counterparts. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. However, it'd be fair to raise concerns over whether this level of revenue performance will continue given the harsh conditions facing the industry. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Andhra Cements (1 shouldn't be ignored!) that you should be aware of before investing here.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.