Alarum Technologies Ltd.'s (TLV:ALAR) 26% Share Price Surge Not Quite Adding Up

Despite an already strong run, Alarum Technologies Ltd. (TLV:ALAR) shares have been powering on, with a gain of 26% in the last thirty days. The last 30 days were the cherry on top of the stock's 441% gain in the last year, which is nothing short of spectacular.

Following the firm bounce in price, you could be forgiven for thinking Alarum Technologies is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in Israel's Software industry have P/S ratios below 2.6x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

See our latest analysis for Alarum Technologies

How Has Alarum Technologies Performed Recently?

Recent times have been advantageous for Alarum Technologies as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

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

How Is Alarum Technologies' Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as Alarum Technologies' is when the company's growth is on track to outshine the industry.

Taking a look back first, we see that the company grew revenue by an impressive 42% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. So we can start by confirming that the company has done a tremendous job of growing revenue over that time.

Shifting to the future, estimates from the dual analysts covering the company suggest revenue should grow by 28% over the next year. Meanwhile, the rest of the industry is forecast to expand by 27%, which is not materially different.

In light of this, it's curious that Alarum Technologies' P/S sits above the majority of other companies. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. Although, additional gains will be difficult to achieve as this level of revenue growth is likely to weigh down the share price eventually.

What Does Alarum Technologies' P/S Mean For Investors?

The large bounce in Alarum Technologies' shares has lifted the company's P/S handsomely. 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.

Analysts are forecasting Alarum Technologies' revenues to only grow on par with the rest of the industry, which has lead to the high P/S ratio being unexpected. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. A positive change is needed in order to justify the current price-to-sales ratio.

Having said that, be aware Alarum Technologies is showing 3 warning signs in our investment analysis, and 2 of those are concerning.

If you're unsure about the strength of Alarum Technologies' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.