Why Investors Shouldn't Be Surprised By ELEMENTS, Inc.'s (TSE:5246) 53% Share Price Surge

Despite an already strong run, ELEMENTS, Inc. (TSE:5246) shares have been powering on, with a gain of 53% in the last thirty days. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 29% in the last twelve months.

After such a large jump in price, you could be forgiven for thinking ELEMENTS is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 9.5x, considering almost half the companies in Japan's Software industry have P/S ratios below 2.4x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for ELEMENTS

What Does ELEMENTS' Recent Performance Look Like?

Revenue has risen firmly for ELEMENTS recently, which is pleasing to see. Perhaps the market is expecting this decent revenue performance to beat out the industry over the near term, which has kept the P/S propped up. If not, then existing shareholders may be a little nervous about the viability 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 ELEMENTS' earnings, revenue and cash flow.

Is There Enough Revenue Growth Forecasted For ELEMENTS?

In order to justify its P/S ratio, ELEMENTS would need to produce outstanding growth that's well in excess of the industry.

Retrospectively, the last year delivered an exceptional 18% gain to the company's top line. The latest three year period has also seen an excellent 104% 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.

When compared to the industry's one-year growth forecast of 15%, the most recent medium-term revenue trajectory is noticeably more alluring

With this in consideration, it's not hard to understand why ELEMENTS' P/S is high relative to its industry peers. Presumably shareholders aren't keen to offload something they believe will continue to outmanoeuvre the wider industry.

The Final Word

Shares in ELEMENTS have seen a strong upwards swing lately, which has really helped boost its P/S figure. 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 ELEMENTS 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. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under threat. Unless the recent medium-term conditions change, they will continue to provide strong support to the share price.

It is also worth noting that we have found 2 warning signs for ELEMENTS (1 is potentially serious!) that you need to take into consideration.

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.