After Leaping 29% DroneShield Limited (ASX:DRO) Shares Are Not Flying Under The Radar

DroneShield Limited (ASX:DRO) shares have continued their recent momentum with a 29% gain in the last month alone. The annual gain comes to 144% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, given around half the companies in Australia's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 1x, you may consider DroneShield as a stock to avoid entirely with its 8.6x 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 DroneShield

What Does DroneShield's Recent Performance Look Like?

DroneShield certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. If not, then existing shareholders might be a little nervous about the viability of the share price.

Keen to find out how analysts think DroneShield's future stacks up against the industry? In that case, our free report is a great place to start.

How Is DroneShield's Revenue Growth Trending?

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

Retrospectively, the last year delivered an exceptional 226% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 28% per annum during the coming three years according to the only analyst following the company. With the industry only predicted to deliver 11% each year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why DroneShield'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.

The Final Word

DroneShield'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.

As we suspected, our examination of DroneShield's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 3 warning signs for DroneShield that you should be aware of.

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.