Electro Optic Systems Holdings Limited (ASX:EOS) Looks Just Right With A 33% Price Jump

Electro Optic Systems Holdings Limited (ASX:EOS) shares have continued their recent momentum with a 33% gain in the last month alone. This latest share price bounce rounds out a remarkable 484% gain over the last twelve months.

After such a large jump in price, Electro Optic Systems Holdings' price-to-sales (or "P/S") ratio of 12.8x might make it look like a strong sell right now compared to other companies in the Aerospace & Defense industry in Australia, where around half of the companies have P/S ratios below 5x and even P/S below 1.8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Electro Optic Systems Holdings

How Electro Optic Systems Holdings Has Been Performing

Electro Optic Systems Holdings hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. 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 Electro Optic Systems Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Electro Optic Systems Holdings?

Electro Optic Systems Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 40%. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 30% per year during the coming three years according to the five analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 13% per year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Electro Optic Systems Holdings' 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

Electro Optic Systems Holdings' 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.

Our look into Electro Optic Systems Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

Plus, you should also learn about this 1 warning sign we've spotted with Electro Optic Systems Holdings.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.