There's Reason For Concern Over Arab Sea Information Systems Company's (TADAWUL:7201) Massive 29% Price Jump

Arab Sea Information Systems Company (TADAWUL:7201) shares have had a really impressive month, gaining 29% after a shaky period beforehand. But the last month did very little to improve the 59% share price decline over the last year.

After such a large jump in price, when almost half of the companies in Saudi Arabia's Software industry have price-to-sales ratios (or "P/S") below 3.3x, you may consider Arab Sea Information Systems as a stock not worth researching with its 19.8x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Arab Sea Information Systems

How Has Arab Sea Information Systems Performed Recently?

As an illustration, revenue has deteriorated at Arab Sea Information Systems over the last year, which is not ideal at all. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/S from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Arab Sea Information Systems will help you shine a light on its historical performance.

Is There Enough Revenue Growth Forecasted For Arab Sea Information Systems?

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

Retrospectively, the last year delivered a frustrating 29% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 5.6% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 29% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

With this in mind, we find it worrying that Arab Sea Information Systems' P/S exceeds that of its industry peers. It seems most investors are ignoring the fairly limited recent growth rates and are hoping for a turnaround in the company's business prospects. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Bottom Line On Arab Sea Information Systems' P/S

The strong share price surge has lead to Arab Sea Information Systems' P/S soaring as well. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

The fact that Arab Sea Information Systems currently trades on a higher P/S relative to the industry is an oddity, since its recent three-year growth is lower than the wider industry forecast. Right now we aren't comfortable with the high P/S as this revenue performance isn't likely to support such positive sentiment for long. If recent medium-term revenue trends continue, it will place shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Arab Sea Information Systems, and understanding them should be part of your investment process.

If you're unsure about the strength of Arab Sea Information Systems' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.