What Alarum Technologies Ltd.'s (TLV:ALAR) 32% Share Price Gain Is Not Telling You

Despite an already strong run, Alarum Technologies Ltd. (TLV:ALAR) shares have been powering on, with a gain of 32% in the last thirty days. This latest share price bounce rounds out a remarkable 1,109% gain over the last twelve months.

Following the firm bounce in price, Alarum Technologies may be sending very bearish signals at the moment with a price-to-sales (or "P/S") ratio of 5.6x, since almost half of all companies in the Software industry in Israel have P/S ratios under 3.5x and even P/S lower than 0.7x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Alarum Technologies

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

Recent times have been advantageous for Alarum Technologies as its revenues have been rising faster than most other companies. The P/S is probably high because investors think this strong revenue performance will continue. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Alarum Technologies' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 43% last year. This great performance means it was also able to deliver immense revenue growth over the last three years. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 21% during the coming year according to the sole analyst following the company. With the industry predicted to deliver 25% growth, the company is positioned for a weaker revenue result.

With this information, we find it concerning that Alarum Technologies is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

The Key Takeaway

The strong share price surge has lead to Alarum Technologies' 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.

It comes as a surprise to see Alarum Technologies trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

You should always think about risks. Case in point, we've spotted 2 warning signs for Alarum Technologies you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.