After Leaping 34% Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) Shares Are Not Flying Under The Radar

Despite an already strong run, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) shares have been powering on, with a gain of 34% in the last thirty days. The annual gain comes to 278% following the latest surge, making investors sit up and take notice.

After such a large jump in price, given around half the companies in the United States' Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 2.9x, you may consider Kratos Defense & Security Solutions as a stock to avoid entirely with its 12.3x 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.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

See our latest analysis for Kratos Defense & Security Solutions

How Kratos Defense & Security Solutions Has Been Performing

With revenue growth that's inferior to most other companies of late, Kratos Defense & Security Solutions has been relatively sluggish. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Keen to find out how analysts think Kratos Defense & Security Solutions' 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 Kratos Defense & Security Solutions?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Kratos Defense & Security Solutions' to be considered reasonable.

Retrospectively, the last year delivered a decent 7.8% gain to the company's revenues. Pleasingly, revenue has also lifted 46% 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.

Looking ahead now, revenue is anticipated to climb by 17% each year during the coming three years according to the analysts following the company. That's shaping up to be materially higher than the 11% each year growth forecast for the broader industry.

With this in mind, it's not hard to understand why Kratos Defense & Security Solutions' P/S is high relative to its industry peers. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Key Takeaway

The strong share price surge has lead to Kratos Defense & Security Solutions' P/S soaring as well. 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.

We've established that Kratos Defense & Security Solutions maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for Kratos Defense & Security Solutions with six simple checks will allow you to discover any risks that could be an issue.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.