After Leaping 27% Neogen Chemicals Limited (NSE:NEOGEN) Shares Are Not Flying Under The Radar

Neogen Chemicals Limited (NSE:NEOGEN) shares have had a really impressive month, gaining 27% after a shaky period beforehand. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Since its price has surged higher, you could be forgiven for thinking Neogen Chemicals is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.9x, considering almost half the companies in India's Chemicals industry have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Neogen Chemicals

What Does Neogen Chemicals' P/S Mean For Shareholders?

Recent times have been pleasing for Neogen Chemicals as its revenue has risen in spite of the industry's average revenue going into reverse. Perhaps the market is expecting the company's future revenue growth to buck the trend of the industry, contributing to a higher P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Neogen Chemicals.

How Is Neogen Chemicals' Revenue Growth Trending?

Neogen Chemicals' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a decent 8.7% gain to the company's revenues. Pleasingly, revenue has also lifted 113% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 30% during the coming year according to the four analysts following the company. That's shaping up to be materially higher than the 11% growth forecast for the broader industry.

In light of this, it's understandable that Neogen Chemicals' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What Does Neogen Chemicals' P/S Mean For Investors?

Shares in Neogen Chemicals have seen a strong upwards swing lately, which has really helped boost its P/S figure. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look into Neogen Chemicals shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Having said that, be aware Neogen Chemicals is showing 3 warning signs in our investment analysis, and 1 of those is concerning.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.