Cloud Hosting

Lloyds Engineering Works Limited (NSE:LLOYDSENGG) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 133% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, you could be forgiven for thinking Lloyds Engineering Works is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 16.4x, considering almost half the companies in India's Machinery industry have P/S ratios below 3.2x. 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 Lloyds Engineering Works

Lloyds Engineering Works 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Lloyds Engineering Works' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 100% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

When compared to the industry's one-year growth forecast of 15%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we can see why Lloyds Engineering Works is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The strong share price surge has lead to Lloyds Engineering Works' P/S soaring as well. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

It's no surprise that Lloyds Engineering Works can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

You need to take note of risks, for example - Lloyds Engineering Works has 4 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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).

Our new AI Stock Screener scans the market every day to uncover opportunities.

Dividend Powerhouses (3%+ Yield) Undervalued Small Caps with Insider Buying High growth Tech and AI Companies

Or build your own from over 50 metrics.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

More:

Investors Appear Satisfied With Lloyds Engineering Works Limited's (NSE:LLOYDSENGG) Prospects As Shares Rocket 25% - Simply Wall St