Why Investors Shouldn't Be Surprised By ikeGPS Group Limited's (NZSE:IKE) 30% Share Price Surge

ikeGPS Group Limited (NZSE:IKE) shares have had a really impressive month, gaining 30% after a shaky period beforehand. The last month tops off a massive increase of 109% in the last year.

Since its price has surged higher, you could be forgiven for thinking ikeGPS Group is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 6.7x, considering almost half the companies in New Zealand's Electronic industry have P/S ratios below 1.3x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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View our latest analysis for ikeGPS Group

What Does ikeGPS Group's P/S Mean For Shareholders?

ikeGPS Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. Perhaps the market is expecting the poor revenue to reverse, justifying it's current high P/S.. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on ikeGPS Group.

Do Revenue Forecasts Match The High P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as steep as ikeGPS Group's is when the company's growth is on track to outshine the industry decidedly.

Retrospectively, the last year delivered a frustrating 12% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 114% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 23% per annum as estimated by the three analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 16% per year, which is noticeably less attractive.

With this in mind, it's not hard to understand why ikeGPS Group's P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On ikeGPS Group's P/S

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

Our look into ikeGPS Group 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.

Don't forget that there may be other risks. For instance, we've identified 3 warning signs for ikeGPS Group that you should be aware of.

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.