Spirit Technology Solutions Ltd (ASX:ST1) Soars 29% But It's A Story Of Risk Vs Reward

Spirit Technology Solutions Ltd (ASX:ST1) shares have had a really impressive month, gaining 29% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 29% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Spirit Technology Solutions' P/S ratio of 0.6x, since the median price-to-sales (or "P/S") ratio for the Telecom industry in Australia is also close to 1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Spirit Technology Solutions

How Spirit Technology Solutions Has Been Performing

For example, consider that Spirit Technology Solutions' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is moderate because investors think the company might still do enough to be in line with the broader industry in the near future. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Spirit Technology Solutions will help you shine a light on its historical performance.

How Is Spirit Technology Solutions' Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like Spirit Technology Solutions' is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 80% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 6.1% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that Spirit Technology Solutions is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Spirit Technology Solutions' P/S Mean For Investors?

Spirit Technology Solutions' 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.

We didn't quite envision Spirit Technology Solutions' P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. It appears some are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for Spirit Technology Solutions (of which 2 are potentially serious!) you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com