SRT Marine Systems plc's (LON:SRT) 27% Price Boost Is Out Of Tune With Revenues

SRT Marine Systems plc (LON:SRT) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The annual gain comes to 178% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, you could be forgiven for thinking SRT Marine Systems is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 13.5x, considering almost half the companies in the United Kingdom's Communications industry have P/S ratios below 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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Check out our latest analysis for SRT Marine Systems

How SRT Marine Systems Has Been Performing

For instance, SRT Marine Systems' receding revenue in recent times would have to be some food for thought. Perhaps the market believes the company can do enough to outperform the rest of the industry in the near future, which is keeping the P/S ratio high. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SRT Marine Systems' earnings, revenue and cash flow.

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

In order to justify its P/S ratio, SRT Marine Systems would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered a frustrating 50% decrease to the company's top line. Still, the latest three year period has seen an excellent 36% overall rise in revenue, in spite of its unsatisfying short-term performance. 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.

Weighing that recent medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 9.7% shows it's about the same on an annualised basis.

In light of this, it's curious that SRT Marine Systems' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average recent growth rates and are willing to pay up for exposure to the stock. Nevertheless, they may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

What Does SRT Marine Systems' P/S Mean For Investors?

SRT Marine Systems' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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 SRT Marine Systems has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. Right now we are uncomfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. Unless the recent medium-term conditions improve, it's challenging to accept these prices as being reasonable.

There are also other vital risk factors to consider and we've discovered 3 warning signs for SRT Marine Systems (2 are a bit unpleasant!) that you should be aware of before investing here.

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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.