Further Upside For VA Tech Wabag Limited (NSE:WABAG) Shares Could Introduce Price Risks After 31% Bounce

VA Tech Wabag Limited (NSE:WABAG) shares have continued their recent momentum with a 31% gain in the last month alone. The last month tops off a massive increase of 145% in the last year.

In spite of the firm bounce in price, it's still not a stretch to say that VA Tech Wabag's price-to-sales (or "P/S") ratio of 2x right now seems quite "middle-of-the-road" compared to the Water Utilities industry in India, where the median P/S ratio is around 1.6x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for VA Tech Wabag

How Has VA Tech Wabag Performed Recently?

VA Tech Wabag hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on VA Tech Wabag.

How Is VA Tech Wabag's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like VA Tech Wabag's to be considered reasonable.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 2.6%. This has soured the latest three-year period, which nevertheless managed to deliver a decent 8.7% overall rise in revenue. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the three analysts covering the company suggest revenue should grow by 15% over the next year. That's shaping up to be materially higher than the 11% growth forecast for the broader industry.

In light of this, it's curious that VA Tech Wabag's P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

What We Can Learn From VA Tech Wabag's P/S?

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

Looking at VA Tech Wabag's analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

Before you take the next step, you should know about the 2 warning signs for VA Tech Wabag that we have uncovered.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.