Tatva Chintan Pharma Chem Limited's (NSE:TATVA) P/S Is Still On The Mark Following 25% Share Price Bounce

Tatva Chintan Pharma Chem Limited (NSE:TATVA) shares have continued their recent momentum with a 25% gain in the last month alone. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 16% in the last twelve months.

Since its price has surged higher, when almost half of the companies in India's Chemicals industry have price-to-sales ratios (or "P/S") below 1.5x, you may consider Tatva Chintan Pharma Chem as a stock not worth researching with its 5.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Tatva Chintan Pharma Chem

How Tatva Chintan Pharma Chem Has Been Performing

While the industry has experienced revenue growth lately, Tatva Chintan Pharma Chem's revenue has gone into reverse gear, which is not great. It might be that many expect the dour revenue performance to recover substantially, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Tatva Chintan Pharma Chem.

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

In order to justify its P/S ratio, Tatva Chintan Pharma Chem would need to produce outstanding growth that's well in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.7%. As a result, revenue from three years ago have also fallen 12% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 17% per year as estimated by the three analysts watching the company. That's shaping up to be materially higher than the 12% per year growth forecast for the broader industry.

In light of this, it's understandable that Tatva Chintan Pharma Chem's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

Shares in Tatva Chintan Pharma Chem have seen a strong upwards swing lately, which has really helped boost its P/S figure. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Tatva Chintan Pharma Chem maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Chemicals industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Tatva Chintan Pharma Chem that you should be aware of.

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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.