Why We're Not Concerned Yet About Karman Holdings Inc.'s (NYSE:KRMN) 27% Share Price Plunge

Karman Holdings Inc. (NYSE:KRMN) shares have retraced a considerable 27% in the last month, reversing a fair amount of their solid recent performance. Longer-term shareholders will rue the drop in the share price, since it's now virtually flat for the year after a promising few quarters.

Although its price has dipped substantially, you could still be forgiven for thinking Karman Holdings is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 19.7x, considering almost half the companies in the United States' Aerospace & Defense industry have P/S ratios below 3x. 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 Karman Holdings

What Does Karman Holdings' Recent Performance Look Like?

With revenue growth that's superior to most other companies of late, Karman Holdings has been doing relatively well. It seems that many are expecting the strong revenue performance to persist, which has raised the P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Karman Holdings.

Is There Enough Revenue Growth Forecasted For Karman Holdings?

Karman Holdings' P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 29%. Pleasingly, revenue has also lifted 89% in aggregate from three years ago, thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Turning to the outlook, the next three years should generate growth of 27% each year as estimated by the six analysts watching the company. Meanwhile, the rest of the industry is forecast to only expand by 15% each year, which is noticeably less attractive.

With this in mind, it's not hard to understand why Karman Holdings' P/S is high relative to its industry peers. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Karman Holdings' P/S

Even after such a strong price drop, Karman Holdings' P/S still exceeds the industry median significantly. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Karman Holdings' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. At this stage investors feel the potential for a deterioration in revenues is quite remote, justifying the elevated P/S ratio. It's hard to see the share price falling strongly in the near future under these circumstances.

There are also other vital risk factors to consider and we've discovered 3 warning signs for Karman Holdings (1 is concerning!) that you should be aware of before investing here.

If you're unsure about the strength of Karman Holdings' 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.