What Catapult Group International Ltd's (ASX:CAT) 26% Share Price Gain Is Not Telling You

Despite an already strong run, Catapult Group International Ltd (ASX:CAT) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days bring the annual gain to a very sharp 95%.

After such a large jump in price, given close to half the companies operating in Australia's Software industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Catapult Group International as a stock to potentially avoid with its 3.1x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Catapult Group International

How Catapult Group International Has Been Performing

Catapult Group International could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. If not, then existing shareholders may be very nervous about the viability of the share price.

Keen to find out how analysts think Catapult Group International's future stacks up against the industry? In that case, our free report is a great place to start.

What Are Revenue Growth Metrics Telling Us About The High P/S?

In order to justify its P/S ratio, Catapult Group International would need to produce impressive growth in excess of the industry.

Taking a look back first, we see that the company grew revenue by an impressive 19% last year. The latest three year period has also seen an excellent 50% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 16% per year during the coming three years according to the four analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 20% per annum, which is noticeably more attractive.

With this information, we find it concerning that Catapult Group International is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

Catapult Group International's P/S is on the rise since its shares have risen strongly. 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.

We've concluded that Catapult Group International currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You always need to take note of risks, for example - Catapult Group International has 2 warning signs we think you should be aware of.

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).

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