TARC Limited (NSE:TARC) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

TARC Limited (NSE:TARC) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 262% in the last year.

Since its price has surged higher, TARC's price-to-sales (or "P/S") ratio of 11.6x might make it look like a strong sell right now compared to other companies in the Real Estate industry in India, where around half of the companies have P/S ratios below 6.3x and even P/S below 2x 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 lofty.

Check out our latest analysis for TARC

What Does TARC's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, TARC has been doing very well. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is TARC's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 102% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 111% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 33% shows it's noticeably less attractive.

In light of this, it's alarming that TARC's P/S sits above the majority of other companies. 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.

What Does TARC's P/S Mean For Investors?

Shares in TARC have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of TARC revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. 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. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Plus, you should also learn about these 2 warning signs we've spotted with TARC (including 1 which is a bit concerning).

If you're unsure about the strength of TARC's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.