Market Participants Recognise DroneShield Limited's (ASX:DRO) Revenues Pushing Shares 27% Higher

DroneShield Limited (ASX:DRO) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. The last month tops off a massive increase of 115% in the last year.

Since its price has surged higher, you could be forgiven for thinking DroneShield is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 10.8x, considering almost half the companies in Australia's Aerospace & Defense industry have P/S ratios below 0.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for DroneShield

What Does DroneShield's P/S Mean For Shareholders?

Recent times have been advantageous for DroneShield as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. 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 DroneShield.

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 DroneShield's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered an exceptional 173% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 39% per annum as estimated by the two analysts watching the company. That's shaping up to be materially higher than the 13% each year growth forecast for the broader industry.

With this in mind, it's not hard to understand why DroneShield's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On DroneShield's P/S

Shares in DroneShield have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into DroneShield shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with DroneShield (at least 1 which is potentially serious), and understanding them should be part of your investment process.

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.

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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.