What KPIT Technologies Limited's (NSE:KPITTECH) 26% Share Price Gain Is Not Telling You

KPIT Technologies Limited (NSE:KPITTECH) shareholders have had their patience rewarded with a 26% share price jump in the last month. The last 30 days bring the annual gain to a very sharp 75%.

Following the firm bounce in price, KPIT Technologies may be sending strong sell signals at present with a price-to-sales (or "P/S") ratio of 10.3x, when you consider almost half of the companies in the Software industry in India have P/S ratios under 5.3x and even P/S lower than 2x aren't out of the ordinary. 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 KPIT Technologies

What Does KPIT Technologies' P/S Mean For Shareholders?

Recent times have been advantageous for KPIT Technologies as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. If not, then existing shareholders might be a little nervous about the viability of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on KPIT Technologies.

How Is KPIT Technologies' Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 45%. Pleasingly, revenue has also lifted 141% 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.

Looking ahead now, revenue is anticipated to climb by 19% per year during the coming three years according to the analysts following the company. That's shaping up to be similar to the 18% per annum growth forecast for the broader industry.

In light of this, it's curious that KPIT Technologies' P/S sits above the majority of other companies. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

What Does KPIT Technologies' P/S Mean For Investors?

The strong share price surge has lead to KPIT Technologies' P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Analysts are forecasting KPIT Technologies' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. Unless the company can jump ahead of the rest of the industry in the short-term, it'll be a challenge to maintain the share price at current levels.

Having said that, be aware KPIT Technologies is showing 1 warning sign in our investment analysis, you should know about.

If these risks are making you reconsider your opinion on KPIT Technologies, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com