Why Investors Shouldn't Be Surprised By Keywords Studios plc's (LON:KWS) 90% Share Price Surge

Keywords Studios plc (LON:KWS) shareholders would be excited to see that the share price has had a great month, posting a 90% gain and recovering from prior weakness. Notwithstanding the latest gain, the annual share price return of 9.7% isn't as impressive.

After such a large jump in price, you could be forgiven for thinking Keywords Studios is a stock not worth researching with a price-to-sales ratios (or "P/S") of 2.7x, considering almost half the companies in the United Kingdom's IT industry have P/S ratios below 1.4x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Keywords Studios

How Keywords Studios Has Been Performing

Keywords Studios certainly has been doing a good job lately as it's been growing revenue more than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

How Is Keywords Studios' Revenue Growth Trending?

Keywords Studios' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.

Taking a look back first, we see that the company managed to grow revenues by a handy 13% last year. Pleasingly, revenue has also lifted 109% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Shifting to the future, estimates from the eleven analysts covering the company suggest revenue should grow by 11% per year over the next three years. With the industry only predicted to deliver 6.0% each year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Keywords Studios' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Bottom Line On Keywords Studios' P/S

Keywords Studios' 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.

Our look into Keywords Studios shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. 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 Keywords Studios (1 is potentially serious!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.