Revenues Tell The Story For Dropsuite Limited (ASX:DSE) As Its Stock Soars 26%
Despite an already strong run, Dropsuite Limited (ASX:DSE) shares have been powering on, with a gain of 26% in the last thirty days. The annual gain comes to 113% following the latest surge, making investors sit up and take notice.
Following the firm bounce in price, given around half the companies in Australia's Software industry have price-to-sales ratios (or "P/S") below 3x, you may consider Dropsuite as a stock to avoid entirely with its 11.4x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.
Check out our latest analysis for Dropsuite
What Does Dropsuite's P/S Mean For Shareholders?
Recent times have been advantageous for Dropsuite 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. If not, then existing shareholders might be a little nervous about the viability of the share price.
Keen to find out how analysts think Dropsuite's future stacks up against the industry? In that case, our free report is a great place to start.Do Revenue Forecasts Match The High P/S Ratio?
In order to justify its P/S ratio, Dropsuite would need to produce outstanding growth that's well in excess of the industry.
If we review the last year of revenue growth, the company posted a terrific increase of 37%. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.
Turning to the outlook, the next three years should generate growth of 25% each year as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 20% each year, which is noticeably less attractive.
With this information, we can see why Dropsuite is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.
The Key Takeaway
Shares in Dropsuite have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.
As we suspected, our examination of Dropsuite's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.
Don't forget that there may be other risks. For instance, we've identified 1 warning sign for Dropsuite that 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).
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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.
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