Orient Paper & Industries Limited (NSE:ORIENTPPR) Looks Just Right With A 31% Price Jump

Orient Paper & Industries Limited (NSE:ORIENTPPR) shareholders have had their patience rewarded with a 31% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 50%.

After such a large jump in price, when almost half of the companies in India's Forestry industry have price-to-sales ratios (or "P/S") below 1x, you may consider Orient Paper & Industries as a stock probably not worth researching with its 1.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Orient Paper & Industries

What Does Orient Paper & Industries' Recent Performance Look Like?

For example, consider that Orient Paper & Industries' financial performance has been poor lately as its revenue has been in decline. 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Orient Paper & Industries' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as high as Orient Paper & Industries' is when the company's growth is on track to outshine 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 12%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 88% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 12% shows it's noticeably more attractive.

In light of this, it's understandable that Orient Paper & Industries' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Key Takeaway

Orient Paper & Industries shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

It's no surprise that Orient Paper & Industries can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Orient Paper & Industries that you should be aware of.

If you're unsure about the strength of Orient Paper & Industries' 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com