Solex Energy Limited (NSE:SOLEX) Soars 27% But It's A Story Of Risk Vs Reward

Solex Energy Limited (NSE:SOLEX) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 82%.

Even after such a large jump in price, Solex Energy's price-to-sales (or "P/S") ratio of 2x might still make it look like a strong buy right now compared to the wider Semiconductor industry in India, where around half of the companies have P/S ratios above 8.6x and even P/S above 21x 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.

See our latest analysis for Solex Energy

What Does Solex Energy's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Solex Energy 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. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

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

Is There Any Revenue Growth Forecasted For Solex Energy?

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

Retrospectively, the last year delivered an explosive gain to the company's top line. Pleasingly, revenue has also lifted 160% in aggregate from three years ago, thanks to the last 12 months of explosive growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 24%, the most recent medium-term revenue trajectory is noticeably more alluring

In light of this, it's peculiar that Solex Energy's P/S sits below the majority of other companies. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Solex Energy's P/S?

Solex Energy's recent share price jump still sees fails to bring its P/S alongside the industry median. 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 Solex Energy revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

Having said that, be aware Solex Energy is showing 4 warning signs in our investment analysis, and 3 of those are concerning.

If you're unsure about the strength of Solex Energy'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.