There's Reason For Concern Over CleanSpace Holdings Limited's (ASX:CSX) Massive 25% Price Jump

CleanSpace Holdings Limited (ASX:CSX) shares have continued their recent momentum with a 25% gain in the last month alone. The annual gain comes to 147% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, you could still be forgiven for feeling indifferent about CleanSpace Holdings' P/S ratio of 3.6x, since the median price-to-sales (or "P/S") ratio for the Medical Equipment industry in Australia is also close to 3.9x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for CleanSpace Holdings

How Has CleanSpace Holdings Performed Recently?

CleanSpace Holdings certainly has been doing a good job lately as it's been growing revenue more than most other companies. One possibility is that the P/S ratio is moderate because investors think this strong revenue performance might be about to tail off. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Want the full picture on analyst estimates for the company? Then our free report on CleanSpace Holdings will help you uncover what's on the horizon.

How Is CleanSpace Holdings' Revenue Growth Trending?

In order to justify its P/S ratio, CleanSpace Holdings would need to produce growth that's similar to the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 29%. Although, its longer-term performance hasn't been as strong with three-year revenue growth being relatively non-existent overall. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 21% per annum during the coming three years according to the only analyst following the company. That's shaping up to be materially lower than the 154% each year growth forecast for the broader industry.

With this in mind, we find it intriguing that CleanSpace Holdings' P/S is closely matching its industry peers. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

CleanSpace Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

When you consider that CleanSpace Holdings' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. Circumstances like this present a risk to current and prospective investors who may see share prices fall if the low revenue growth impacts the sentiment.

You should always think about risks. Case in point, we've spotted 1 warning sign for CleanSpace Holdings you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.