There's Reason For Concern Over Wonder Electricals Limited's (NSE:WEL) Massive 85% Price Jump

Wonder Electricals Limited (NSE:WEL) shares have continued their recent momentum with a 85% gain in the last month alone. This latest share price bounce rounds out a remarkable 318% gain over the last twelve months.

In spite of the firm bounce in price, there still wouldn't be many who think Wonder Electricals' price-to-sales (or "P/S") ratio of 2.7x is worth a mention when the median P/S in India's Electronic industry is similar at about 3.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Wonder Electricals

How Wonder Electricals Has Been Performing

Revenue has risen firmly for Wonder Electricals recently, which is pleasing to see. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders probably aren't too pessimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Wonder Electricals will help you shine a light on its historical performance.

How Is Wonder Electricals' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Wonder Electricals' to be considered reasonable.

Retrospectively, the last year delivered a decent 14% gain to the company's revenues. The latest three year period has also seen an excellent 86% overall rise in revenue, aided somewhat 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 34% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Wonder Electricals' P/S is comparable to that of its industry peers. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now Wonder Electricals' P/S is back within range of the industry median. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Wonder Electricals' average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

You should always think about risks. Case in point, we've spotted 1 warning sign for Wonder Electricals you should be aware of.

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