Investors Still Aren't Entirely Convinced By Arcario AB's (STO:ARCA) Revenues Despite 26% Price Jump

Arcario AB (STO:ARCA) shareholders would be excited to see that the share price has had a great month, posting a 26% gain and recovering from prior weakness. The last month tops off a massive increase of 113% in the last year.

Although its price has surged higher, Arcario may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.7x, considering almost half of all companies in the Software industry in Sweden have P/S ratios greater than 2.3x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for Arcario

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

With revenue growth that's exceedingly strong of late, Arcario has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.

Although there are no analyst estimates available for Arcario, 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 Low P/S?

The only time you'd be truly comfortable seeing a P/S as low as Arcario's is when the company's growth is on track to lag the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 152%. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

When compared to the industry's one-year growth forecast of 17%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that Arcario is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Arcario's P/S?

The latest share price surge wasn't enough to lift Arcario's P/S close to 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 Arcario revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

And what about other risks? Every company has them, and we've spotted 4 warning signs for Arcario (of which 1 is a bit unpleasant!) you should know about.

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.