Revenues Tell The Story For Science Arts, Inc. (TSE:4412) As Its Stock Soars 25%

Despite an already strong run, Science Arts, Inc. (TSE:4412) shares have been powering on, with a gain of 25% in the last thirty days. The last month tops off a massive increase of 220% in the last year.

After such a large jump in price, when almost half of the companies in Japan's Software industry have price-to-sales ratios (or "P/S") below 2.2x, you may consider Science Arts as a stock not worth researching with its 8.8x P/S ratio. 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.

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View our latest analysis for Science Arts

What Does Science Arts' Recent Performance Look Like?

Recent times have been quite advantageous for Science Arts as its revenue has been rising very briskly. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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 Science Arts' earnings, revenue and cash flow.

How Is Science Arts' Revenue Growth Trending?

In order to justify its P/S ratio, Science Arts 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 terrific increase of 40%. The latest three year period has also seen an excellent 151% 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.

Comparing that to the industry, which is only predicted to deliver 13% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's understandable that Science Arts' P/S sits above the majority of other companies. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

What Does Science Arts' P/S Mean For Investors?

Science Arts' P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

It's no surprise that Science Arts can support its high P/S given the strong revenue growth its experienced over the last three-year is superior to the current industry outlook. At this stage investors feel the potential continued revenue growth in the future is great enough to warrant an inflated P/S. Barring any significant changes to the company's ability to make money, the share price should continue to be propped up.

It is also worth noting that we have found 2 warning signs for Science Arts (1 can't be ignored!) that you need to take into consideration.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.