Tirupati Forge Limited's (NSE:TIRUPATIFL) Popularity With Investors Is Under Threat From Overpricing

When close to half the companies in the Metals and Mining industry in India have price-to-sales ratios (or "P/S") below 1.2x, you may consider Tirupati Forge Limited (NSE:TIRUPATIFL) as a stock to avoid entirely with its 4.5x 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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See our latest analysis for Tirupati Forge

What Does Tirupati Forge's Recent Performance Look Like?

We'd have to say that with no tangible growth over the last year, Tirupati Forge's revenue has been unimpressive. One possibility is that the P/S is high because investors think the benign revenue growth will improve to outperform the broader industry in the near future. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Although there are no analyst estimates available for Tirupati Forge, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

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

The only time you'd be truly comfortable seeing a P/S as steep as Tirupati Forge's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. Fortunately, a few good years before that means that it was still able to grow revenue by 17% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 18% shows it's noticeably less attractive.

In light of this, it's alarming that Tirupati Forge's P/S sits above the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Final Word

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.

The fact that Tirupati Forge currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Tirupati Forge you should know about.

If these risks are making you reconsider your opinion on Tirupati Forge, 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.