E2E Networks Limited (NSE:E2E) Stocks Shoot Up 28% But Its P/S Still Looks Reasonable

E2E Networks Limited (NSE:E2E) shares have continued their recent momentum with a 28% gain in the last month alone. The last 30 days were the cherry on top of the stock's 514% gain in the last year, which is nothing short of spectacular.

Since its price has surged higher, E2E Networks' price-to-sales (or "P/S") ratio of 25.6x might make it look like a strong sell right now compared to other companies in the IT industry in India, where around half of the companies have P/S ratios below 4.2x 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.

View our latest analysis for E2E Networks

How Has E2E Networks Performed Recently?

Recent times have been quite advantageous for E2E Networks as its revenue has been rising very briskly. 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.

Although there are no analyst estimates available for E2E Networks, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

In order to justify its P/S ratio, E2E Networks would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 65% gain to the company's top line. The latest three year period has also seen an excellent 198% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

This is in contrast to the rest of the industry, which is expected to grow by 7.4% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why E2E Networks is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

What We Can Learn From E2E Networks' P/S?

Shares in E2E Networks have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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.

It's no surprise that E2E Networks can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. In the eyes of shareholders, the probability of a continued growth trajectory is great enough to prevent the P/S from pulling back. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for E2E Networks that you should be aware of.

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.