There's Reason For Concern Over BIMobject AB's (STO:BIM) Massive 27% Price Jump

BIMobject AB (STO:BIM) shareholders would be excited to see that the share price has had a great month, posting a 27% gain and recovering from prior weakness. The last 30 days bring the annual gain to a very sharp 31%.

After such a large jump in price, you could be forgiven for thinking BIMobject is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.3x, considering almost half the companies in Sweden's Software industry have P/S ratios below 1.9x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

View our latest analysis for BIMobject

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

With revenue growth that's inferior to most other companies of late, BIMobject has been relatively sluggish. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.

Want the full picture on analyst estimates for the company? Then our free report on BIMobject will help you uncover what's on the horizon.

How Is BIMobject's Revenue Growth Trending?

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

If we review the last year of revenue growth, the company posted a terrific increase of 18%. Revenue has also lifted 12% in aggregate from three years ago, mostly thanks to the last 12 months of growth. So we can start by confirming that the company has actually done a good job of growing revenue over that time.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue should grow by 4.8% over the next year. That's shaping up to be materially lower than the 16% growth forecast for the broader industry.

With this information, we find it concerning that BIMobject is trading at a P/S higher than the industry. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of revenue growth is likely to weigh heavily on the share price eventually.

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

The large bounce in BIMobject's shares has lifted the company's P/S handsomely. 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.

It comes as a surprise to see BIMobject trade at such a high P/S given the revenue forecasts look less than stellar. The weakness in the company's revenue estimate doesn't bode well for the elevated P/S, which could take a fall if the revenue sentiment doesn't improve. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for BIMobject (1 is a bit unpleasant!) that you need to be mindful of.

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