With A 41% Price Drop For DroneShield Limited (ASX:DRO) You'll Still Get What You Pay For

DroneShield Limited (ASX:DRO) shares have retraced a considerable 41% in the last month, reversing a fair amount of their solid recent performance. Of course, over the longer-term many would still wish they owned shares as the stock's price has soared 251% in the last twelve months.

Although its price has dipped substantially, when almost half of the companies in Australia's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 0.8x, you may still consider DroneShield as a stock not worth researching with its 15.8x P/S ratio. 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.

See our latest analysis for DroneShield

What Does DroneShield's Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, DroneShield has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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?

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

If we review the last year of revenue growth, the company posted a terrific increase of 226%. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 45% each year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 7.5% per year, which is noticeably less attractive.

In light of this, it's understandable that DroneShield's 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 Final Word

Even after such a strong price drop, DroneShield's P/S still exceeds the industry median significantly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

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. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Having said that, be aware DroneShield is showing 2 warning signs in our investment analysis, you should know about.

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.

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