Optimistic Investors Push KIOCL Limited (NSE:KIOCL) Shares Up 32% But Growth Is Lacking

Despite an already strong run, KIOCL Limited (NSE:KIOCL) shares have been powering on, with a gain of 32% in the last thirty days. The annual gain comes to 148% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, you could be forgiven for thinking KIOCL is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.5x, considering almost half the companies in India's Metals and Mining industry have P/S ratios below 1.2x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for KIOCL

What Does KIOCL's P/S Mean For Shareholders?

KIOCL has been doing a good job lately as it's been growing revenue at a solid pace. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders may be a little 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 KIOCL's earnings, revenue and cash flow.

How Is KIOCL's Revenue Growth Trending?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 14% last year. Revenue has also lifted 14% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 7.6% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's alarming that KIOCL's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What We Can Learn From KIOCL's P/S?

The strong share price surge has lead to KIOCL's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of KIOCL revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

You need to take note of risks, for example - KIOCL has 3 warning signs (and 2 which are significant) we think you should know about.

If you're unsure about the strength of KIOCL's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.