There's Reason For Concern Over Agilysys, Inc.'s (NASDAQ:AGYS) Massive 25% Price Jump

Agilysys, Inc. (NASDAQ:AGYS) shareholders are no doubt pleased to see that the share price has bounced 25% in the last month, although it is still struggling to make up recently lost ground. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 14% over that time.

Since its price has surged higher, Agilysys' price-to-sales (or "P/S") ratio of 9x might make it look like a strong sell right now compared to other companies in the Software industry in the United States, where around half of the companies have P/S ratios below 4.8x and even P/S below 1.9x are quite common. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

Our free stock report includes 1 warning sign investors should be aware of before investing in Agilysys. Read for free now.

View our latest analysis for Agilysys

What Does Agilysys' Recent Performance Look Like?

Agilysys' revenue growth of late has been pretty similar to most other companies. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. 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 Agilysys' future stacks up against the industry? In that case, our free report is a great place to start.

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

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

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The strong recent performance means it was also able to grow revenue by 73% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the five analysts covering the company suggest revenue should grow by 17% over the next year. With the industry predicted to deliver 15% growth , the company is positioned for a comparable revenue result.

With this information, we find it interesting that Agilysys is trading at a high P/S compared to the industry. Apparently many investors in the company are more bullish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for disappointment if the P/S falls to levels more in line with the growth outlook.

The Final Word

The strong share price surge has lead to Agilysys' 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.

Given Agilysys' future revenue forecasts are in line with the wider industry, the fact that it trades at an elevated P/S is somewhat surprising. When we see revenue growth that just matches the industry, we don't expect elevates P/S figures to remain inflated for the long-term. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Agilysys, and understanding should be part of your investment process.

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).

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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.