Why Investors Shouldn't Be Surprised By Microlise Group plc's (LON:SAAS) 29% Share Price Surge

Despite an already strong run, Microlise Group plc (LON:SAAS) shares have been powering on, with a gain of 29% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 5.2% isn't as impressive.

Although its price has surged higher, it's still not a stretch to say that Microlise Group's price-to-sales (or "P/S") ratio of 2.3x right now seems quite "middle-of-the-road" compared to the Software industry in the United Kingdom, where the median P/S ratio is around 2.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for Microlise Group

What Does Microlise Group's Recent Performance Look Like?

Microlise Group could be doing better as it's been growing revenue less than most other companies lately. One possibility is that the P/S ratio is moderate because investors think this lacklustre revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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

How Is Microlise Group's Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 10% gain to the company's revenues. Pleasingly, revenue has also lifted 33% in aggregate from three years ago, partly 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 10% per year as estimated by the two analysts watching the company. That's shaping up to be similar to the 9.5% per year growth forecast for the broader industry.

With this information, we can see why Microlise Group is trading at a fairly similar P/S to the industry. It seems most investors are expecting to see average future growth and are only willing to pay a moderate amount for the stock.

The Bottom Line On Microlise Group's P/S

Its shares have lifted substantially and now Microlise Group's P/S is back within range of the industry median. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

Our look at Microlise Group's revenue growth estimates show that its P/S is about what we expect, as both metrics follow closely with the industry averages. At this stage investors feel the potential for an improvement or deterioration in revenue isn't great enough to push P/S in a higher or lower direction. All things considered, if the P/S and revenue estimates contain no major shocks, then it's hard to see the share price moving strongly in either direction in the near future.

Having said that, be aware Microlise Group is showing 2 warning signs in our investment analysis, you should know about.

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.