Shilpa Medicare Limited's (NSE:SHILPAMED) Shares Climb 28% But Its Business Is Yet to Catch Up

Shilpa Medicare Limited (NSE:SHILPAMED) shares have had a really impressive month, gaining 28% after a shaky period beforehand. The last 30 days bring the annual gain to a very sharp 42%.

Since its price has surged higher, when almost half of the companies in India's Pharmaceuticals industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Shilpa Medicare as a stock probably not worth researching with its 3.3x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

See our latest analysis for Shilpa Medicare

What Does Shilpa Medicare's P/S Mean For Shareholders?

It looks like revenue growth has deserted Shilpa Medicare recently, which is not something to boast about. It might be that many are expecting an improvement to the uninspiring revenue performance over the coming period, 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.

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

Do Revenue Forecasts Match The High P/S Ratio?

Shilpa Medicare's P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

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 23% 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 12% shows it's noticeably less attractive.

With this in mind, we find it worrying that Shilpa Medicare's P/S exceeds that of its industry peers. Apparently many investors in the company are way more bullish than recent times would indicate and aren't willing to let go of their stock at any price. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Bottom Line On Shilpa Medicare's P/S

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

The fact that Shilpa Medicare 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. When we see slower than industry revenue growth but an elevated P/S, there's considerable risk of the share price declining, sending the P/S lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

We don't want to rain on the parade too much, but we did also find 2 warning signs for Shilpa Medicare that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.