What Alarum Technologies Ltd.'s (TLV:ALAR) 27% Share Price Gain Is Not Telling You

Explore Alarum Technologies's Fair Values from the Community and select yours

Despite an already strong run, Alarum Technologies Ltd. (TLV:ALAR) 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 34% in the last twelve months.

Since its price has surged higher, you could be forgiven for thinking Alarum Technologies is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in Israel's Software industry have P/S ratios below 1.5x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for Alarum Technologies

How Alarum Technologies Has Been Performing

With revenue growth that's inferior to most other companies of late, Alarum Technologies has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. If not, then existing shareholders may be very 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.

Is There Enough Revenue Growth Forecasted For Alarum Technologies?

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

If we review the last year of revenue growth, the company posted a worthy increase of 4.7%. The latest three year period has also seen an excellent 136% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 19% during the coming year according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 22%, which is noticeably more attractive.

In light of this, it's alarming that Alarum Technologies' P/S sits above the majority of other companies. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Alarum Technologies' P/S has grown nicely over the last month thanks to a handy boost in the share price. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Despite analysts forecasting some poorer-than-industry revenue growth figures for Alarum Technologies, this doesn't appear to be impacting the P/S in the slightest. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Alarum Technologies that you need to be mindful of.

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.