Subdued Growth No Barrier To Nelco Limited's (NSE:NELCO) Price

When you see that almost half of the companies in the Communications industry in India have price-to-sales ratios (or "P/S") below 3.1x, Nelco Limited (NSE:NELCO) looks to be giving off strong sell signals with its 6.8x P/S ratio. 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.

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See our latest analysis for Nelco

How Has Nelco Performed Recently?

For instance, Nelco's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite 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 Nelco's earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For Nelco?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Nelco's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 3.1% decrease to the company's top line. This has soured the latest three-year period, which nevertheless managed to deliver a decent 6.7% overall rise in revenue. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been mostly respectable for the company.

This is in contrast to the rest of the industry, which is expected to grow by 39% over the next year, materially higher than the company's recent medium-term annualised growth rates.

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

The Key Takeaway

It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Nelco revealed its poor three-year revenue trends aren't detracting from the P/S as much as we though, given they look worse than current industry expectations. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless there is a significant improvement in the company's medium-term performance, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

It is also worth noting that we have found 1 warning sign for Nelco that you need to take into consideration.

If these risks are making you reconsider your opinion on Nelco, 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.