Wonder Electricals Limited (NSE:WEL) Stock Rockets 29% As Investors Are Less Pessimistic Than Expected

Wonder Electricals Limited (NSE:WEL) shares have had a really impressive month, gaining 29% after a shaky period beforehand. The last 30 days were the cherry on top of the stock's 457% gain in the last year, which is nothing short of spectacular.

Even after such a large jump in price, there still wouldn't be many who think Wonder Electricals' price-to-sales (or "P/S") ratio of 2.9x is worth a mention when the median P/S in India's Electronic industry is similar at about 2.8x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Wonder Electricals

How Wonder Electricals Has Been Performing

With revenue growth that's exceedingly strong of late, Wonder Electricals has been doing very well. It might be that many expect the strong revenue performance to wane, which has kept the share price, and thus the P/S ratio, from rising. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

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

Is There Some Revenue Growth Forecasted For Wonder Electricals?

In order to justify its P/S ratio, Wonder Electricals would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered an exceptional 78% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 99% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 43% over the next year, materially higher than the company's recent medium-term annualised growth rates.

In light of this, it's curious that Wonder Electricals' P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does Wonder Electricals' P/S Mean For Investors?

Wonder Electricals appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our examination of Wonder Electricals revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. 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 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.

Having said that, be aware Wonder Electricals is showing 3 warning signs in our investment analysis, you should know about.

If you're unsure about the strength of Wonder Electricals' 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.