Diamond Power Infrastructure Limited (NSE:DIACABS) shares have continued their recent momentum with a 48% gain in the last month alone. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.
Following the firm bounce in price, given around half the companies in India’s Electrical industry have price-to-sales ratios (or “P/S”) below 3x, you may consider Diamond Power Infrastructure as a stock to avoid entirely with its 6.3x P/S ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.
See our latest analysis for Diamond Power Infrastructure
What Does Diamond Power Infrastructure’s Recent Performance Look Like?
Diamond Power Infrastructure certainly has been doing a great job lately as it’s been growing its revenue at a really rapid pace. It seems that many are expecting the strong revenue performance to beat most other companies over the coming period, which has increased investors’ willingness to pay up for the stock. If not, then existing shareholders might be a little nervous about the viability of the share price.
Although there are no analyst estimates available for Diamond Power Infrastructure, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Diamond Power Infrastructure’s Revenue Growth Trending?
In order to justify its P/S ratio, Diamond Power Infrastructure would need to produce outstanding growth that’s well in excess of the industry.
If we review the last year of revenue growth, we see the company’s revenues grew exponentially. The amazing performance means it was also able to deliver huge revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.
Comparing that to the industry, which is only predicted to deliver 32% growth in the next 12 months, the company’s momentum is stronger based on recent medium-term annualised revenue results.
With this in consideration, it’s not hard to understand why Diamond Power Infrastructure’s P/S is high relative to its industry peers. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.
What We Can Learn From Diamond Power Infrastructure’s P/S?
Diamond Power Infrastructure’s P/S has grown nicely over the last month thanks to a handy boost in the share price. 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’ve established that Diamond Power Infrastructure maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren’t under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.
Before you take the next step, you should know about the 2 warning signs for Diamond Power Infrastructure 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.
Valuation is complex, but we’re helping make it simple.
Find out whether Diamond Power Infrastructure is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.
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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.