What You Can Learn From Adani Total Gas Limited's (NSE:ATGL) P/S

When close to half the companies in the Gas Utilities industry in India have price-to-sales ratios (or "P/S") below 2.3x, you may consider Adani Total Gas Limited (NSE:ATGL) as a stock to avoid entirely with its 23.1x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Adani Total Gas

What Does Adani Total Gas' Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for Adani Total Gas, which is generally not a bad outcome. It might be that many expect the reasonable 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.

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.

Is There Enough Revenue Growth Forecasted For Adani Total Gas?

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.

Taking a look back first, we see that the company managed to grow revenues by a handy 3.4% last year. This was backed up an excellent period prior to see revenue up by 181% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 3.3% 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. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the industry. However, its current revenue trajectory will be very difficult to maintain against the headwinds other companies are facing at the moment.

The Key Takeaway

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Adani Total Gas revealed its growing revenue over the medium-term is helping prop up its high P/S compared to its peers, given the industry is set to shrink. It could be said that investors feel this revenue growth will continue into the future, justifying a higher P/S ratio. 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.

Many other vital risk factors can be found on the company's balance sheet. Our free balance sheet analysis for Adani Total Gas with six simple checks will allow you to discover any risks that could be an issue.

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.