ExaWizards Inc.'s (TSE:4259) 25% Cheaper Price Remains In Tune With Revenues

Unfortunately for some shareholders, the ExaWizards Inc. (TSE:4259) share price has dived 25% in the last thirty days, prolonging recent pain. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 41% in that time.

Even after such a large drop in price, you could still be forgiven for thinking ExaWizards is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 3.4x, considering almost half the companies in Japan's IT industry have P/S ratios below 1.1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

See our latest analysis for ExaWizards

How Has ExaWizards Performed Recently?

Recent times have been advantageous for ExaWizards 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. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think ExaWizards' future stacks up against the industry? In that case, our free report is a great place to start.

How Is ExaWizards' Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 50% last year. The latest three year period has also seen an excellent 221% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 34% per annum as estimated by the dual analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 5.2% per year, which is noticeably less attractive.

In light of this, it's understandable that ExaWizards' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From ExaWizards' P/S?

ExaWizards' shares may have suffered, but its P/S remains high. 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.

We've established that ExaWizards maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the IT industry, as expected. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.

You should always think about risks. Case in point, we've spotted 1 warning sign for ExaWizards 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.