Websol Energy System Limited (NSE:WEBELSOLAR) Stock Rockets 30% As Investors Are Less Pessimistic Than Expected

Websol Energy System Limited (NSE:WEBELSOLAR) shares have had a really impressive month, gaining 30% after a shaky period beforehand. This latest share price bounce rounds out a remarkable 553% gain over the last twelve months.

Since its price has surged higher, when almost half of the companies in India's Semiconductor industry have price-to-sales ratios (or "P/S") below 9x, you may consider Websol Energy System as a stock not worth researching with its 22.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Websol Energy System

What Does Websol Energy System's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Websol Energy System has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Websol Energy System's earnings, revenue and cash flow.

How Is Websol Energy System's Revenue Growth Trending?

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

Retrospectively, the last year delivered an explosive gain to the company's top line. Still, revenue has fallen 23% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 31% shows it's an unpleasant look.

In light of this, it's alarming that Websol Energy System'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 very good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does Websol Energy System's P/S Mean For Investors?

Shares in Websol Energy System have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Websol Energy System currently trades on a much higher than expected P/S since its recent revenues have been in decline over the medium-term. Right now we aren't comfortable with the high P/S as this revenue performance is highly unlikely to support such positive sentiment for long. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Before you take the next step, you should know about the 2 warning signs for Websol Energy System (1 is a bit concerning!) that we have uncovered.

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.