Aris Water Solutions, Inc.'s (NYSE:ARIS) 44% Share Price Surge Not Quite Adding Up

Despite an already strong run, Aris Water Solutions, Inc. (NYSE:ARIS) shares have been powering on, with a gain of 44% in the last thirty days. The last 30 days bring the annual gain to a very sharp 80%.

Even after such a large jump in price, it's still not a stretch to say that Aris Water Solutions' price-to-sales (or "P/S") ratio of 1.1x right now seems quite "middle-of-the-road" compared to the Commercial Services industry in the United States, where the median P/S ratio is around 1.2x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Aris Water Solutions

How Has Aris Water Solutions Performed Recently?

With revenue growth that's superior to most other companies of late, Aris Water Solutions has been doing relatively well. It might be that many expect the strong revenue performance to wane, which has kept the P/S ratio from rising. If not, then existing shareholders have reason to be feeling optimistic about the future direction of the share price.

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

Do Revenue Forecasts Match The P/S Ratio?

Aris Water Solutions' P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered an exceptional 22% gain to the company's top line. The strong recent performance means it was also able to grow revenue by 129% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Shifting to the future, estimates from the eight analysts covering the company suggest revenue should grow by 5.3% per year over the next three years. That's shaping up to be materially lower than the 18% per year growth forecast for the broader industry.

With this information, we find it interesting that Aris Water Solutions is trading at a fairly similar P/S compared to the industry. It seems most investors are ignoring the fairly limited growth expectations and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Aris Water Solutions' P/S Mean For Investors?

Aris Water Solutions appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

Our look at the analysts forecasts of Aris Water Solutions' revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. A positive change is needed in order to justify the current price-to-sales ratio.

And what about other risks? Every company has them, and we've spotted 2 warning signs for Aris Water Solutions (of which 1 doesn't sit too well with us!) you should know about.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.