Why Investors Shouldn't Be Surprised By Finatext Holdings Ltd.'s (TSE:4419) 28% Share Price Surge

Despite an already strong run, Finatext Holdings Ltd. (TSE:4419) shares have been powering on, with a gain of 28% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 36% in the last year.

Following the firm bounce in price, given around half the companies in Japan's IT industry have price-to-sales ratios (or "P/S") below 1.2x, you may consider Finatext Holdings as a stock to avoid entirely with its 10.3x 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.

See our latest analysis for Finatext Holdings

What Does Finatext Holdings' P/S Mean For Shareholders?

Recent times have been advantageous for Finatext Holdings as its revenues have been rising faster than most other companies. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. 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 Finatext Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Enough Revenue Growth Forecasted For Finatext Holdings?

Finatext Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered an exceptional 41% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 161% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Looking ahead now, revenue is anticipated to climb by 32% per year during the coming three years according to the dual analysts following the company. With the industry only predicted to deliver 5.1% per year, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Finatext Holdings' P/S sits above the majority of other companies. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

What Does Finatext Holdings' P/S Mean For Investors?

Shares in Finatext Holdings have seen a strong upwards swing lately, which has really helped boost its P/S figure. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Finatext Holdings shows that its P/S ratio remains high on the merit of its strong future revenues. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Finatext Holdings, and understanding should be part of your investment process.

If these risks are making you reconsider your opinion on Finatext Holdings, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com