What Hensoldt AG's (ETR:HAG) 27% Share Price Gain Is Not Telling You

Despite an already strong run, Hensoldt AG (ETR:HAG) shares have been powering on, with a gain of 27% in the last thirty days. The annual gain comes to 114% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, when almost half of the companies in Germany's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 3.1x, you may consider Hensoldt as a stock probably not worth researching with its 4.1x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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Check out our latest analysis for Hensoldt

How Hensoldt Has Been Performing

With revenue growth that's inferior to most other companies of late, Hensoldt has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Hensoldt will help you uncover what's on the horizon.

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

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

If we review the last year of revenue growth, the company posted a terrific increase of 25%. The latest three year period has also seen an excellent 49% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 15% each year as estimated by the eleven analysts watching the company. With the industry predicted to deliver 14% growth each year, the company is positioned for a comparable revenue result.

With this information, we find it interesting that Hensoldt is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Bottom Line On Hensoldt's P/S

Hensoldt shares have taken a big step in a northerly direction, but its P/S is elevated as a result. 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.

Analysts are forecasting Hensoldt's revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Hensoldt (at least 1 which shouldn't be ignored), and understanding them should be part of your investment process.

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.