RAS Technology Holdings Limited's (ASX:RTH) Popularity With Investors Is Clear

When close to half the companies in the Professional Services industry in Australia have price-to-sales ratios (or "P/S") below 1.6x, you may consider RAS Technology Holdings Limited (ASX:RTH) as a stock to potentially avoid with its 2.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for RAS Technology Holdings

What Does RAS Technology Holdings' P/S Mean For Shareholders?

Recent times have been advantageous for RAS Technology 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. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is RAS Technology Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, RAS Technology Holdings would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 31%. The strong recent performance means it was also able to grow revenue by 155% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 23% per annum over the next three years. That's shaping up to be materially higher than the 4.6% per annum growth forecast for the broader industry.

In light of this, it's understandable that RAS Technology Holdings' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On RAS Technology Holdings' P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of RAS Technology Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

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

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

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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.