Why Investors Shouldn't Be Surprised By Aspen Aerogels, Inc.'s (NYSE:ASPN) 40% Share Price Surge

Aspen Aerogels, Inc. (NYSE:ASPN) shares have continued their recent momentum with a 40% gain in the last month alone. The last 30 days bring the annual gain to a very sharp 31%.

After such a large jump in price, you could be forgiven for thinking Aspen Aerogels is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 5.3x, considering almost half the companies in the United States' Chemicals industry have P/S ratios below 1.5x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

See our latest analysis for Aspen Aerogels

How Aspen Aerogels Has Been Performing

Aspen Aerogels certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Aspen Aerogels' future stacks up against the industry? In that case, our free report is a great place to start.

How Is Aspen Aerogels' Revenue Growth Trending?

There's an inherent assumption that a company should far outperform the industry for P/S ratios like Aspen Aerogels' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 41%. The latest three year period has also seen an excellent 73% overall rise in revenue, aided by its short-term performance. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 57% per annum during the coming three years according to the nine analysts following the company. With the industry only predicted to deliver 10% each year, the company is positioned for a stronger revenue result.

With this in mind, it's not hard to understand why Aspen Aerogels' 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 Final Word

Aspen Aerogels' P/S has grown nicely over the last month thanks to a handy boost in the share price. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

As we suspected, our examination of Aspen Aerogels' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

Before you settle on your opinion, we've discovered 2 warning signs for Aspen Aerogels 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.