Improved Revenues Required Before SIOS Corporation (TSE:3744) Stock's 40% Jump Looks Justified

The SIOS Corporation (TSE:3744) share price has done very well over the last month, posting an excellent gain of 40%. The last 30 days bring the annual gain to a very sharp 35%.

Even after such a large jump in price, it would still be understandable if you think SIOS is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.3x, considering almost half the companies in Japan's Software industry have P/S ratios above 2.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for SIOS

How Has SIOS Performed Recently?

SIOS has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is low because investors think this respectable revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on SIOS' earnings, revenue and cash flow.

Is There Any Revenue Growth Forecasted For SIOS?

There's an inherent assumption that a company should underperform the industry for P/S ratios like SIOS' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 10%. The solid recent performance means it was also able to grow revenue by 7.1% in total over the last three years. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 15% shows it's noticeably less attractive.

With this in consideration, it's easy to understand why SIOS' P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What Does SIOS' P/S Mean For Investors?

The latest share price surge wasn't enough to lift SIOS' P/S close to the industry median. 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.

As we suspected, our examination of SIOS revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. If recent medium-term revenue trends continue, it's hard to see the share price experience a reversal of fortunes anytime soon.

Don't forget that there may be other risks. For instance, we've identified 4 warning signs for SIOS (2 are a bit unpleasant) you should be aware 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.