Revenues Not Telling The Story For Electro Optic Systems Holdings Limited (ASX:EOS) After Shares Rise 29%

Despite an already strong run, Electro Optic Systems Holdings Limited (ASX:EOS) shares have been powering on, with a gain of 29% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 80% in the last year.

Following the firm bounce in price, given close to half the companies operating in Australia's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 2x, you may consider Electro Optic Systems Holdings as a stock to potentially avoid with its 3.2x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit.

View our latest analysis for Electro Optic Systems Holdings

What Does Electro Optic Systems Holdings' P/S Mean For Shareholders?

Recent times have been advantageous for Electro Optic Systems Holdings as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 Electro Optic Systems Holdings.

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 high as Electro Optic Systems Holdings' is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 9.0%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 17% in total over the last three years. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 11% per annum as estimated by the five analysts watching the company. With the industry predicted to deliver 12% growth per year, the company is positioned for a comparable revenue result.

With this information, we find it interesting that Electro Optic Systems Holdings is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

The Final Word

Electro Optic Systems Holdings' P/S is on the rise since its shares have risen strongly. 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.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Electro Optic Systems Holdings currently trades on a higher than expected P/S. The fact that the revenue figures aren't setting the world alight has us doubtful that the company's elevated P/S can be sustainable for the long term. A positive change is needed in order to justify the current price-to-sales ratio.

It is also worth noting that we have found 1 warning sign for Electro Optic Systems Holdings that you need to take into consideration.

If these risks are making you reconsider your opinion on Electro Optic Systems Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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.