Why Investors Shouldn't Be Surprised By Aryt Industries Ltd.'s (TLV:ARYT) 32% Share Price Surge

Despite an already strong run, Aryt Industries Ltd. (TLV:ARYT) shares have been powering on, with a gain of 32% in the last thirty days. The annual gain comes to 138% following the latest surge, making investors sit up and take notice.

Following the firm bounce in price, given around half the companies in Israel's Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 2.7x, you may consider Aryt Industries as a stock to avoid entirely with its 7.3x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Aryt Industries

How Aryt Industries Has Been Performing

With revenue growth that's exceedingly strong of late, Aryt Industries has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Aryt Industries will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Aryt Industries?

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

Taking a look back first, we see that the company grew revenue by an impressive 218% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

This is in contrast to the rest of the industry, which is expected to grow by 50% over the next year, materially lower than the company's recent medium-term annualised growth rates.

With this information, we can see why Aryt Industries is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong growth to continue and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to Aryt Industries' P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

As we suspected, our examination of Aryt Industries revealed its three-year revenue trends are contributing to its high P/S, given they look better than current industry expectations. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Aryt Industries, and understanding them should be part of your investment process.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.