Market Participants Recognise VA Tech Wabag Limited's (NSE:WABAG) Revenues Pushing Shares 28% Higher

Despite an already strong run, VA Tech Wabag Limited (NSE:WABAG) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 255% in the last year.

Following the firm bounce in price, you could be forgiven for thinking VA Tech Wabag is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.8x, considering almost half the companies in India's Water Utilities industry have P/S ratios below 1.6x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for VA Tech Wabag

What Does VA Tech Wabag's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, VA Tech Wabag has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

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

The only time you'd be truly comfortable seeing a P/S as steep as VA Tech Wabag's is when the company's growth is on track to outshine the industry decidedly.

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. This isn't what shareholders were looking for as it means they've been left with a 4.3% decline in revenue over the last three years in total. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Turning to the outlook, the next year should generate growth of 20% as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 18% growth forecast for the broader industry.

With this in mind, it's not hard to understand why VA Tech Wabag's P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

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

The strong share price surge has lead to VA Tech Wabag's P/S soaring as well. 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 VA Tech Wabag's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Many other vital risk factors can be found on the company's balance sheet. Take a look at our free balance sheet analysis for VA Tech Wabag with six simple checks on some of these key factors.

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).

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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.