Optimistic Investors Push Vertiseit AB (publ) (STO:VERT B) Shares Up 27% But Growth Is Lacking

Vertiseit AB (publ) (STO:VERT B) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Looking back a bit further, it's encouraging to see the stock is up 62% in the last year.

After such a large jump in price, you could be forgiven for thinking Vertiseit is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.6x, considering almost half the companies in Sweden's Software industry have P/S ratios below 2.7x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

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Check out our latest analysis for Vertiseit

How Vertiseit Has Been Performing

Recent times have been advantageous for Vertiseit as its revenues have been rising faster than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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How Is Vertiseit's Revenue Growth Trending?

In order to justify its P/S ratio, Vertiseit would need to produce impressive growth in excess of the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 72%. The latest three year period has also seen an excellent 186% overall rise in revenue, aided by its short-term performance. So we can start by confirming that the company has done a great job of growing revenue over that time.

Turning to the outlook, the next three years should generate growth of 11% per year as estimated by the three analysts watching the company. With the industry predicted to deliver 10% growth per annum, the company is positioned for a comparable revenue result.

With this in consideration, we find it intriguing that Vertiseit's P/S is higher than its industry peers. It seems most investors are ignoring the fairly average growth expectations and are willing to pay up for exposure to the stock. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Vertiseit's P/S is on the rise since its shares have risen strongly. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Seeing as its revenues are forecast to grow in line with the wider industry, it would appear that Vertiseit currently trades on a higher than expected P/S. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Don't forget that there may be other risks. For instance, we've identified 2 warning signs for Vertiseit (1 is concerning) you should be aware of.

If you're unsure about the strength of Vertiseit'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.