Why Investors Shouldn't Be Surprised By Kratos Defense & Security Solutions, Inc.'s (NASDAQ:KTOS) 35% Share Price Surge

Despite an already strong run, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) shares have been powering on, with a gain of 35% in the last thirty days. The annual gain comes to 242% following the latest surge, making investors sit up and take notice.

Since its price has surged higher, when almost half of the companies in the United States' Aerospace & Defense industry have price-to-sales ratios (or "P/S") below 3.2x, you may consider Kratos Defense & Security Solutions as a stock not worth researching with its 9.6x P/S ratio. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

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Check out our latest analysis for Kratos Defense & Security Solutions

What Does Kratos Defense & Security Solutions' P/S Mean For Shareholders?

With revenue growth that's inferior to most other companies of late, Kratos Defense & Security Solutions has been relatively sluggish. One possibility is that the P/S ratio is high because investors think this lacklustre revenue performance will improve markedly. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

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

Retrospectively, the last year delivered a decent 7.8% gain to the company's revenues. The latest three year period has also seen an excellent 46% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 17% per annum over the next three years. With the industry only predicted to deliver 9.6% per annum, the company is positioned for a stronger revenue result.

In light of this, it's understandable that Kratos Defense & Security Solutions' P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

What We Can Learn From Kratos Defense & Security Solutions' P/S?

The strong share price surge has lead to Kratos Defense & Security Solutions' P/S soaring as well. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our look into Kratos Defense & Security Solutions shows that its P/S ratio remains high on the merit of its strong future revenues. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 1 warning sign for Kratos Defense & Security Solutions that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.