Websol Energy System Limited's (NSE:WEBELSOLAR) Popularity With Investors Under Threat As Stock Sinks 26%

Unfortunately for some shareholders, the Websol Energy System Limited (NSE:WEBELSOLAR) share price has dived 26% in the last thirty days, prolonging recent pain. The good news is that in the last year, the stock has shone bright like a diamond, gaining 146%.

Although its price has dipped substantially, you could still be forgiven for thinking Websol Energy System is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 8.8x, considering almost half the companies in India's Semiconductor industry have P/S ratios below 5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Websol Energy System

How Has Websol Energy System Performed Recently?

Websol Energy System certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to outperform the wider market, which has seemingly got people interested in the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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.

If we review the last year of revenue growth, we see the company's revenues grew exponentially. The latest three year period has also seen an excellent 116% overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 8,051% shows it's noticeably less attractive.

With this in mind, we find it worrying that Websol Energy System'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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

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

Websol Energy System's shares may have suffered, but its P/S remains high. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

The fact that Websol Energy System 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 observe slower-than-industry revenue growth alongside a high P/S ratio, we assume there to be a significant risk of the share price decreasing, which would result in a lower P/S ratio. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these the share price as being reasonable.

Plus, you should also learn about these 2 warning signs we've spotted with Websol Energy System.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.