Sudarshan Chemical Industries Limited's (NSE:SUDARSCHEM) 33% Share Price Surge Not Quite Adding Up

Despite an already strong run, Sudarshan Chemical Industries Limited (NSE:SUDARSCHEM) shares have been powering on, with a gain of 33% in the last thirty days. The last month tops off a massive increase of 112% in the last year.

Since its price has surged higher, given close to half the companies operating in India's Chemicals industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Sudarshan Chemical Industries as a stock to potentially avoid with its 2.3x 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 as high as it is.

See our latest analysis for Sudarshan Chemical Industries

What Does Sudarshan Chemical Industries' P/S Mean For Shareholders?

With its revenue growth in positive territory compared to the declining revenue of most other companies, Sudarshan Chemical Industries has been doing quite well of late. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on Sudarshan Chemical Industries will help you uncover what's on the horizon.

How Is Sudarshan Chemical Industries' Revenue Growth Trending?

In order to justify its P/S ratio, Sudarshan Chemical Industries would need to produce impressive growth in excess of the industry.

Retrospectively, the last year delivered a decent 11% gain to the company's revenues. The latest three year period has also seen an excellent 37% overall rise in revenue, aided somewhat by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 12% per annum during the coming three years according to the eight analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 12% per year, which is not materially different.

With this in consideration, we find it intriguing that Sudarshan Chemical Industries' P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What We Can Learn From Sudarshan Chemical Industries' P/S?

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

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Sudarshan Chemical Industries currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

You need to take note of risks, for example - Sudarshan Chemical Industries has 3 warning signs (and 1 which is significant) we think you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.