Why Investors Shouldn't Be Surprised By Adani Total Gas Limited's (NSE:ATGL) 96% Share Price Surge

Adani Total Gas Limited (NSE:ATGL) shareholders would be excited to see that the share price has had a great month, posting a 96% gain and recovering from prior weakness. Still, the 30-day jump doesn't change the fact that longer term shareholders have seen their stock decimated by the 71% share price drop in the last twelve months.

After such a large jump in price, 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 26.3x, considering almost half the companies in India's Gas Utilities industry have P/S ratios below 1.9x. 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.

View our latest analysis for Adani Total Gas

How Has Adani Total Gas Performed Recently?

The revenue growth achieved at Adani Total Gas over the last year would be more than acceptable for most companies. 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.

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

How Is Adani Total Gas' Revenue Growth Trending?

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.

Taking a look back first, we see that the company managed to grow revenues by a handy 7.9% last year. The latest three year period has also seen an excellent 179% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Comparing that to the industry, which is predicted to shrink 7.4% in the next 12 months, the company's positive momentum based on recent medium-term revenue results is a bright spot for the moment.

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.

What We Can Learn From Adani Total Gas' P/S?

The strong share price surge has lead to Adani Total Gas' P/S soaring as well. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

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. However, it'd be fair to raise concerns over whether this level of revenue performance will continue given the harsh conditions facing the industry. If things remain consistent though, shareholders shouldn't expect any major share price shocks in the near term.

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

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.