Advenica AB (publ) (STO:ADVE) Stock Rockets 42% As Investors Are Less Pessimistic Than Expected

Advenica AB (publ) (STO:ADVE) shareholders would be excited to see that the share price has had a great month, posting a 42% gain and recovering from prior weakness. Looking back a bit further, it's encouraging to see the stock is up 54% in the last year.

Since its price has surged higher, given close to half the companies operating in Sweden's Software industry have price-to-sales ratios (or "P/S") below 2.5x, you may consider Advenica as a stock to potentially avoid with its 3.5x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Advenica

What Does Advenica's P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Advenica has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Advenica's 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 Advenica?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Advenica's to be considered reasonable.

Retrospectively, the last year delivered a decent 8.9% gain to the company's revenues. Pleasingly, revenue has also lifted 60% in aggregate from three years ago, partly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been superb for the company.

Turning to the outlook, the next year should generate growth of 8.5% as estimated by the sole analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 20%, which is noticeably more attractive.

With this information, we find it concerning that Advenica is trading at a P/S higher than the industry. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

Advenica shares have taken a big step in a northerly direction, but its P/S is elevated as a result. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've concluded that Advenica currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. At these price levels, investors should remain cautious, particularly if things don't improve.

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

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.