Investors Appear Satisfied With Xaar plc's (LON:XAR) Prospects As Shares Rocket 27%

Despite an already strong run, Xaar plc (LON:XAR) shares have been powering on, with a gain of 27% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Following the firm bounce in price, when almost half of the companies in the United Kingdom's Tech industry have price-to-sales ratios (or "P/S") below 0.7x, you may consider Xaar as a stock probably not worth researching with its 1.6x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Xaar

What Does Xaar's Recent Performance Look Like?

The recently shrinking revenue for Xaar has been in line with the industry. One possibility is that the P/S ratio is high because investors think the company can turn things around and break free from the broader downward trend in revenue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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

Is There Enough Revenue Growth Forecasted For Xaar?

In order to justify its P/S ratio, Xaar would need to produce impressive growth in excess of the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 3.0%. Still, the latest three year period has seen an excellent 47% overall rise in revenue, in spite of its unsatisfying short-term performance. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 9.7% per annum as estimated by the four analysts watching the company. That's shaping up to be materially higher than the 4.9% per year growth forecast for the broader industry.

With this information, we can see why Xaar is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Xaar's P/S Mean For Investors?

The large bounce in Xaar's shares has lifted the company's P/S handsomely. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

As we suspected, our examination of Xaar's analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

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

If these risks are making you reconsider your opinion on Xaar, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.