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

Prism Johnson Limited (NSE:PRSMJOHNSN) shares have continued their recent momentum with a 25% gain in the last month alone. 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.

Although its price has surged higher, considering around half the companies operating in India's Basic Materials industry have price-to-sales ratios (or "P/S") above 1.7x, you may still consider Prism Johnson as an solid investment opportunity with its 1.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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See our latest analysis for Prism Johnson

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

Prism Johnson could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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 Low P/S?

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

Retrospectively, the last year delivered a frustrating 3.7% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 16% in aggregate from three years ago, thanks to the earlier period of growth. 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 should grow by 4.8% per annum over the next three years. Meanwhile, the rest of the industry is forecast to expand by 6.3% each year, which is not materially different.

In light of this, it's peculiar that Prism Johnson's P/S sits below the majority of other companies. Apparently some shareholders are doubtful of the forecasts and have been accepting lower selling prices.

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

The latest share price surge wasn't enough to lift Prism Johnson's P/S close to the industry median. 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.

We've seen that Prism Johnson currently trades on a lower than expected P/S since its forecast growth is in line with the wider industry. The low P/S could be an indication that the revenue growth estimates are being questioned by the market. 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.

If these risks are making you reconsider your opinion on Prism Johnson, 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.