Electrotherm (India) Limited (NSE:ELECTHERM) Soars 29% But It's A Story Of Risk Vs Reward

Despite an already strong run, Electrotherm (India) Limited (NSE:ELECTHERM) shares have been powering on, with a gain of 29% in the last thirty days. This latest share price bounce rounds out a remarkable 849% gain over the last twelve months.

Even after such a large jump in price, when close to half the companies operating in India's Metals and Mining industry have price-to-sales ratios (or "P/S") above 1.1x, you may still consider Electrotherm (India) as an enticing stock to check out with its 0.2x P/S ratio. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Electrotherm (India)

How Has Electrotherm (India) Performed Recently?

With revenue growth that's exceedingly strong of late, Electrotherm (India) has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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 Electrotherm (India)'s earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For Electrotherm (India)?

In order to justify its P/S ratio, Electrotherm (India) would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered an exceptional 54% gain to the company's top line. The latest three year period has also seen an excellent 70% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 8.2% shows it's noticeably more attractive.

With this in mind, we find it intriguing that Electrotherm (India)'s P/S isn't as high compared to that of its industry peers. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

Electrotherm (India)'s stock price has surged recently, but its but its P/S still remains modest. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Electrotherm (India) revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Having said that, be aware Electrotherm (India) is showing 3 warning signs in our investment analysis, and 2 of those make us uncomfortable.

If these risks are making you reconsider your opinion on Electrotherm (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.