Adani Total Gas Limited's (NSE:ATGL) Price In Tune With Revenues

When close to half the companies in the Gas Utilities industry in India have price-to-sales ratios (or "P/S") below 1.7x, you may consider Adani Total Gas Limited (NSE:ATGL) as a stock to avoid entirely with its 13x 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.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

Check out our latest analysis for Adani Total Gas

How Adani Total Gas Has Been Performing

The revenue growth achieved at Adani Total Gas over the last year would be more than acceptable for most companies. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little 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 Adani Total Gas' earnings, revenue and cash flow.

Do Revenue Forecasts Match The High P/S Ratio?

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

If we review the last year of revenue growth, the company posted a worthy increase of 9.1%. Pleasingly, revenue has also lifted 85% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

In contrast to the company, the rest of the industry is expected to decline by 3.9% over the next year, which puts the company's recent medium-term positive growth rates in a good light for now.

In light of this, it's understandable that Adani Total Gas' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. Nonetheless, with most other businesses facing an uphill battle, staying on its current revenue path is no certainty.

What Does Adani Total Gas' P/S Mean For Investors?

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.

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. We still remain cautious about the company's ability to stay its recent course and swim against the current of the broader industry turmoil. If things remain consistent though, shareholders shouldn't expect any major share price shocks in the near term.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for Adani Total Gas with six simple checks.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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

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.