Balaji Telefilms Limited (NSE:BALAJITELE) Surges 34% Yet Its Low P/S Is No Reason For Excitement

The Balaji Telefilms Limited (NSE:BALAJITELE) share price has done very well over the last month, posting an excellent gain of 34%. Taking a wider view, although not as strong as the last month, the full year gain of 22% is also fairly reasonable.

Even after such a large jump in price, Balaji Telefilms' price-to-sales (or "P/S") ratio of 0.9x might still make it look like a strong buy right now compared to the wider Entertainment industry in India, where around half of the companies have P/S ratios above 5.2x and even P/S above 23x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

View our latest analysis for Balaji Telefilms

How Has Balaji Telefilms Performed Recently?

With revenue growth that's exceedingly strong of late, Balaji Telefilms has been doing very well. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. Those who are bullish on Balaji Telefilms will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The Low P/S Ratio?

There's an inherent assumption that a company should far underperform the industry for P/S ratios like Balaji Telefilms' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 60% last year. As a result, it also grew revenue by 21% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing that to the industry, which is predicted to deliver 25% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this information, we can see why Balaji Telefilms is trading at a P/S lower than the industry. It seems most investors are expecting to see the recent limited growth rates continue into the future and are only willing to pay a reduced amount for the stock.

What Does Balaji Telefilms' P/S Mean For Investors?

Even after such a strong price move, Balaji Telefilms' P/S still trails the rest of the industry. 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.

In line with expectations, Balaji Telefilms maintains its low P/S on the weakness of its recent three-year growth being lower than the wider industry forecast. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

You should always think about risks. Case in point, we've spotted 3 warning signs for Balaji Telefilms you should be aware of, and 2 of them don't sit too well with us.

If these risks are making you reconsider your opinion on Balaji Telefilms, 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.