Advenica AB (publ)'s (STO:ADVE) 32% Share Price Surge Not Quite Adding Up

Advenica AB (publ) (STO:ADVE) shares have continued their recent momentum with a 32% gain in the last month alone. The last month tops off a massive increase of 113% in the last year.

Following the firm bounce in price, when almost half of the companies in Sweden's Software industry have price-to-sales ratios (or "P/S") below 2.3x, you may consider Advenica as a stock not worth researching with its 5.7x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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View our latest analysis for Advenica

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

With revenue growth that's exceedingly strong of late, Advenica has been doing very well. The P/S ratio is probably high because investors think this strong revenue growth will be enough to outperform the broader industry in the near future. If not, then existing shareholders might be a little nervous about the viability of the share price.

Although there are no analyst estimates available for Advenica, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The High P/S?

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

Retrospectively, the last year delivered an exceptional 38% gain to the company's top line. The latest three year period has also seen an excellent 65% overall rise in revenue, aided by its short-term performance. Therefore, it's fair to say the revenue growth recently has been superb for the company.

It's interesting to note that the rest of the industry is similarly expected to grow by 18% over the next year, which is fairly even with the company's recent medium-term annualised growth rates.

With this in mind, we find it intriguing that Advenica's P/S exceeds that of its industry peers. Apparently many investors in the company are more bullish than recent times would indicate and aren't willing to let go of their stock right now. Although, additional gains will be difficult to achieve as a continuation of recent revenue trends would weigh down the share price eventually.

The Key Takeaway

Shares in Advenica 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.

Our look into Advenica has shown that it currently trades on a higher than expected P/S since its recent three-year growth is only in line with the wider industry forecast. When we see average revenue with industry-like growth combined with a high P/S, we suspect the share price is at risk of declining, bringing the P/S back in line with the industry too. Unless there is a significant improvement in the company's medium-term trends, it will be difficult to prevent the P/S ratio from declining to a more reasonable level.

Having said that, be aware Advenica is showing 1 warning sign in our investment analysis, you should know about.

If you're unsure about the strength of Advenica's 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.