With A 29% Price Drop For ExaWizards Inc. (TSE:4259) You'll Still Get What You Pay For

The ExaWizards Inc. (TSE:4259) share price has softened a substantial 29% over the previous 30 days, handing back much of the gains the stock has made lately. Looking at the bigger picture, even after this poor month the stock is up 30% in the last year.

In spite of the heavy fall in price, you could still be forgiven for thinking ExaWizards is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 4.9x, considering almost half the companies in Japan's IT industry have P/S ratios below 1.2x. 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 ExaWizards

What Does ExaWizards' P/S Mean For Shareholders?

Recent times have been advantageous for ExaWizards as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is ExaWizards' Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 32% last year. Pleasingly, revenue has also lifted 180% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 38% per annum as estimated by the two analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 5.8% per year, which is noticeably less attractive.

In light of this, it's understandable that ExaWizards' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

ExaWizards' shares may have suffered, but its P/S remains high. 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.

Our look into ExaWizards shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for ExaWizards you should know about.

If you're unsure about the strength of ExaWizards' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.