Adani Total Gas Limited (NSE:ATGL) Stocks Shoot Up 26% But Its P/S Still Looks Reasonable

The Adani Total Gas Limited (NSE:ATGL) share price has done very well over the last month, posting an excellent gain of 26%. But the gains over the last month weren't enough to make shareholders whole, as the share price is still down 6.5% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Adani Total Gas is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.4x, considering almost half the companies in India's Gas Utilities industry have P/S ratios below 1.6x. 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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Check out our latest analysis for Adani Total Gas

How Has Adani Total Gas Performed Recently?

Revenue has risen firmly for Adani Total Gas recently, which is pleasing to see. It might be that many expect the respectable revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

In order to justify its P/S ratio, Adani Total Gas would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a decent 15% gain to the company's revenues. The latest three year period has also seen an excellent 46% 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.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 4.9% shows it's a great look while it lasts.

In light of this, it's understandable that Adani Total Gas' P/S sits above the majority of other companies. Investors are willing to pay more for a stock they hope will buck the trend of the broader industry going backwards. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

The Final Word

The strong share price surge has lead to Adani Total Gas' P/S soaring as well. 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 see that Adani Total Gas justifiably maintains its high P/S on the merits of its recentthree-year revenue growth beating forecasts amidst struggling industry. Right now shareholders are comfortable with the P/S as they are quite confident revenues aren't under threat. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Although, if the company's relative performance doesn't change it will continue to provide strong support to the share price.

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

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.