Why Investors Shouldn't Be Surprised By Gatekeeper Systems Inc.'s (CVE:GSI) 33% Share Price Surge

Despite an already strong run, Gatekeeper Systems Inc. (CVE:GSI) shares have been powering on, with a gain of 33% in the last thirty days. The annual gain comes to 195% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, Gatekeeper Systems may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 6.1x, since almost half of all companies in the Electronic in Canada have P/S ratios under 4.2x and even P/S lower than 2x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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View our latest analysis for Gatekeeper Systems

How Gatekeeper Systems Has Been Performing

For example, consider that Gatekeeper Systems' financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

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

Is There Enough Revenue Growth Forecasted For Gatekeeper Systems?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Gatekeeper Systems' to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 3.4%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 111% in total over the last three years. So we can start by confirming that the company has generally done a very good job of growing revenue over that time, even though it had some hiccups along the way.

This is in contrast to the rest of the industry, which is expected to grow by 21% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Gatekeeper Systems is trading at such a high P/S compared to the industry. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What Does Gatekeeper Systems' P/S Mean For Investors?

Gatekeeper Systems' 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 established that Gatekeeper Systems maintains its high P/S on the strength of its recent three-year growth being higher than the wider industry forecast, as expected. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. If recent medium-term revenue trends continue, it's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Gatekeeper Systems (1 is significant!) that you should be aware of before investing here.

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.