What You Can Learn From E2E Networks Limited's (NSE:E2E) P/S After Its 26% Share Price Crash

To the annoyance of some shareholders, E2E Networks Limited (NSE:E2E) shares are down a considerable 26% in the last month, which continues a horrid run for the company. The good news is that in the last year, the stock has shone bright like a diamond, gaining 245%.

Although its price has dipped substantially, you could still be forgiven for thinking E2E Networks is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 25.7x, considering almost half the companies in India's IT industry have P/S ratios below 3.7x. 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?

With revenue growth that's exceedingly strong of late, E2E Networks 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.

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.

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

The only time you'd be truly comfortable seeing a P/S as steep as E2E Networks' is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 93% gain to the company's top line. Pleasingly, revenue has also lifted 236% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

When compared to the industry's one-year growth forecast of 7.6%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in consideration, it's not hard to understand why E2E Networks' P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

E2E Networks' shares may have suffered, but its P/S remains high. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue 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. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for E2E Networks that you should be aware of.

If you're unsure about the strength of E2E Networks' 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.