Why Investors Shouldn't Be Surprised By S H Kelkar and Company Limited's (NSE:SHK) 25% Share Price Surge

Despite an already strong run, S H Kelkar and Company Limited (NSE:SHK) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 114% in the last year.

Although its price has surged higher, there still wouldn't be many who think S H Kelkar's price-to-sales (or "P/S") ratio of 2.2x is worth a mention when the median P/S in India's Chemicals industry is similar at about 1.8x. 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.

Check out our latest analysis for S H Kelkar

How S H Kelkar Has Been Performing

S H Kelkar certainly has been doing a good job lately as it's been growing revenue more than most other companies. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. 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.

Keen to find out how analysts think S H Kelkar'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?

There's an inherent assumption that a company should be matching the industry for P/S ratios like S H Kelkar's to be considered reasonable.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. The latest three year period has also seen an excellent 33% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the lone analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 13% per annum, which is not materially different.

With this information, we can see why S H Kelkar is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

What We Can Learn From S H Kelkar's P/S?

S H Kelkar appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

A S H Kelkar's P/S seems about right to us given the knowledge that analysts are forecasting a revenue outlook that is similar to the Chemicals industry. Right now shareholders are comfortable with the P/S as they are quite confident future revenue won't throw up any surprises. If all things remain constant, the possibility of a drastic share price movement remains fairly remote.

You should always think about risks. Case in point, we've spotted 6 warning signs for S H Kelkar you should be aware of, and 1 of them shouldn't be ignored.

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.