Revenues Not Telling The Story For GomSpace Group AB (publ) (STO:GOMX) After Shares Rise 29%

GomSpace Group AB (publ) (STO:GOMX) shareholders would be excited to see that the share price has had a great month, posting a 29% gain and recovering from prior weakness. The last month tops off a massive increase of 264% in the last year.

Although its price has surged higher, there still wouldn't be many who think GomSpace Group's price-to-sales (or "P/S") ratio of 3x is worth a mention when the median P/S in Sweden's Aerospace & Defense industry is similar at about 2.6x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for GomSpace Group

How GomSpace Group Has Been Performing

GomSpace Group has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on GomSpace Group will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

Do Revenue Forecasts Match The P/S Ratio?

The only time you'd be comfortable seeing a P/S like GomSpace Group's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered an exceptional 20% gain to the company's top line. Revenue has also lifted 22% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Comparing the recent medium-term revenue trends against the industry's one-year growth forecast of 20% shows it's noticeably less attractive.

With this information, we find it interesting that GomSpace Group is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Key Takeaway

Its shares have lifted substantially and now GomSpace Group's P/S is back within range of the industry median. 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.

Our examination of GomSpace Group revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. When we see weak revenue with slower than industry growth, we suspect the share price is at risk of declining, bringing the P/S back in line with expectations. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

Plus, you should also learn about these 3 warning signs we've spotted with GomSpace Group (including 2 which are a bit unpleasant).

If these risks are making you reconsider your opinion on GomSpace Group, 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.