Further Upside For Prism Johnson Limited (NSE:PRSMJOHNSN) Shares Could Introduce Price Risks After 25% Bounce

Prism Johnson Limited (NSE:PRSMJOHNSN) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 59% in the last year.

Although its price has surged higher, it's still not a stretch to say that Prism Johnson's price-to-sales (or "P/S") ratio of 1.4x right now seems quite "middle-of-the-road" compared to the Basic Materials industry in India, where the median P/S ratio is around 1.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Prism Johnson

How Has Prism Johnson Performed Recently?

Prism Johnson hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

Keen to find out how analysts think Prism Johnson's future stacks up against the industry? In that case, our free report is a great place to start.

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

In order to justify its P/S ratio, Prism Johnson would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 1.1% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 23% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

Shifting to the future, estimates from the four analysts covering the company suggest revenue growth will be highly resilient over the next year growing by 7.4%. With the rest of the industry predicted to shrink by 14%, that would be a fantastic result.

With this in mind, we find it intriguing that Prism Johnson's P/S trades in-line with its industry peers. Apparently some shareholders are skeptical of the contrarian forecasts and have been accepting lower selling prices.

What Does Prism Johnson's P/S Mean For Investors?

Prism Johnson's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We've established that Prism Johnson currently trades on a lower than expected P/S since its growth forecasts are potentially beating a struggling industry. There could be some unobserved threats to revenue preventing the P/S ratio from matching the positive outlook. One such risk is that the company may not live up to analysts' revenue trajectories in tough industry conditions. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

You should always think about risks. Case in point, we've spotted 2 warning signs for Prism Johnson you should be aware of, and 1 of them shouldn't be ignored.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.