Hansen Technologies Limited's (ASX:HSN) Shares Climb 26% But Its Business Is Yet to Catch Up

Hansen Technologies Limited (ASX:HSN) shares have had a really impressive month, gaining 26% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Hansen Technologies' P/S ratio of 3.4x, since the median price-to-sales (or "P/S") ratio for the Software industry in Australia is also close to 2.9x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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See our latest analysis for Hansen Technologies

How Hansen Technologies Has Been Performing

Hansen Technologies 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 moderate because investors think this lacklustre revenue performance will turn around. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

How Is Hansen Technologies' Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a worthy increase of 10.0%. The solid recent performance means it was also able to grow revenue by 16% in total over the last three years. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 6.3% per annum over the next three years. With the industry predicted to deliver 47% growth per annum, the company is positioned for a weaker revenue result.

In light of this, it's curious that Hansen Technologies' P/S sits in line with the majority of other companies. 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

Hansen Technologies' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Given that Hansen Technologies' revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Hansen Technologies 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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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.