Market Participants Recognise DroneShield Limited's (ASX:DRO) Revenues Pushing Shares 30% Higher

DroneShield Limited (ASX:DRO) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The bad news is that even after the stocks recovery in the last 30 days, shareholders are still underwater by about 8.6% over the last year.

Since its price has surged higher, when almost half of the companies in Australia's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 0.9x, you may consider DroneShield as a stock not worth researching with its 11.6x P/S ratio. 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 Recent Performance Look Like?

With revenue growth that's inferior to most other companies of late, DroneShield has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 16% 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. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the two analysts covering the company suggest revenue should grow by 40% each year over the next three years. Meanwhile, the rest of the industry is forecast to only expand by 11% each year, which is noticeably less attractive.

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 Key Takeaway

The strong share price surge has lead to DroneShield's P/S soaring as well. 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.

We've established that DroneShield maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 2 warning signs for DroneShield you should be aware of, and 1 of them is a bit unpleasant.

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

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.