Apollo Micro Systems Limited (NSE:APOLLO) Soars 30% But It's A Story Of Risk Vs Reward

Apollo Micro Systems Limited (NSE:APOLLO) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 123% in the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Apollo Micro Systems' P/S ratio of 13x, since the median price-to-sales (or "P/S") ratio for the Aerospace & Defense industry in India is also close to 11.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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What Does Apollo Micro Systems' P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Apollo Micro Systems has been doing relatively well. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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How Is Apollo Micro Systems' Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Apollo Micro Systems' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 49% last year. The strong recent performance means it was also able to grow revenue by 122% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the only analyst covering the company suggest revenue should grow by 52% over the next year. With the industry only predicted to deliver 24%, the company is positioned for a stronger revenue result.

In light of this, it's curious that Apollo Micro Systems' P/S sits in line with the majority of other companies. Apparently some shareholders are skeptical of the forecasts and have been accepting lower selling prices.

The Bottom Line On Apollo Micro Systems' P/S

Its shares have lifted substantially and now Apollo Micro Systems' P/S is back within range of the industry median. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

Looking at Apollo Micro Systems' analyst forecasts revealed that its superior revenue outlook isn't giving the boost to its P/S that we would've expected. There could be some risks that the market is pricing in, which is preventing the P/S ratio from matching the positive outlook. It appears some are indeed anticipating revenue instability, because these conditions should normally provide a boost to the share price.

You always need to take note of risks, for example - Apollo Micro Systems has 2 warning signs we think you should be aware of.

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

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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.