There's Reason For Concern Over Vectron Systems AG's (ETR:V3S) Massive 28% Price Jump

Despite an already strong run, Vectron Systems AG (ETR:V3S) shares have been powering on, with a gain of 28% in the last thirty days. The annual gain comes to 162% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given close to half the companies operating in Germany's Electronic industry have price-to-sales ratios (or "P/S") below 0.5x, you may consider Vectron Systems as a stock to potentially avoid with its 2.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

Check out our latest analysis for Vectron Systems

What Does Vectron Systems' P/S Mean For Shareholders?

Recent times have been advantageous for Vectron Systems as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Vectron Systems 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 Vectron Systems' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 47% last year. Pleasingly, revenue has also lifted 48% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 12% per year as estimated by the three 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 Vectron Systems is trading at a high P/S compared to the industry. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. 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 Vectron Systems' P/S

Vectron 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.

Analysts are forecasting Vectron Systems' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. Right now we are uncomfortable with the relatively high share price as the predicted future revenues aren't likely to support such positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Vectron Systems, and understanding should be part of your investment process.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.