Deccan Cements Limited (NSE:DECCANCE) Stock Rockets 46% As Investors Are Less Pessimistic Than Expected

Deccan Cements Limited (NSE:DECCANCE) shares have had a really impressive month, gaining 46% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 61%.

Since its price has surged higher, given close to half the companies operating in India's Basic Materials industry have price-to-sales ratios (or "P/S") below 1.7x, you may consider Deccan Cements as a stock to potentially avoid with its 2.8x P/S ratio. 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 Deccan Cements

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

For instance, Deccan Cements' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

Deccan Cements' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than 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 34%. This means it has also seen a slide in revenue over the longer-term as revenue is down 33% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to decline by 0.9% over the next year, or less than the company's recent medium-term annualised revenue decline.

In light of this, it's odd that Deccan Cements' P/S sits above the majority of other companies. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be extremely difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Deccan Cements' P/S is on the rise since its shares have risen strongly. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Our examination of Deccan Cements revealed its sharp three-year contraction in revenue isn't impacting its high P/S anywhere near as much as we would have predicted, given the industry is set to shrink less severely. When we see below average revenue, we suspect the share price is at risk of declining, sending the high P/S lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. This would place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 5 warning signs for Deccan Cements (3 are potentially serious!) that you need to be mindful of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.