S H Kelkar and Company Limited's (NSE:SHK) 28% Price Boost Is Out Of Tune With Revenues

S H Kelkar and Company Limited (NSE:SHK) shareholders have had their patience rewarded with a 28% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 55%.

Although its price has surged higher, it's still not a stretch to say that S H Kelkar's price-to-sales (or "P/S") ratio of 1.8x right now seems quite "middle-of-the-road" compared to the Chemicals industry in India, where the median P/S ratio is around 1.9x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for S H Kelkar

How S H Kelkar Has Been Performing

S H Kelkar has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on S H Kelkar will help you shine a light on its historical performance.

How Is S H Kelkar's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 15%. The latest three year period has also seen an excellent 33% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 15% shows it's noticeably less attractive.

In light of this, it's curious that S H Kelkar's P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Bottom Line On S H Kelkar's P/S

Its shares have lifted substantially and now S H Kelkar's P/S is back within range of the industry median. 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 S H Kelkar's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Having said that, be aware S H Kelkar is showing 6 warning signs in our investment analysis, and 2 of those are potentially serious.

If you're unsure about the strength of S H Kelkar'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.