When you see that almost half of the companies in the Aerospace & Defense industry in the United States have price-to-sales ratios (or "P/S") below 2.4x, Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) looks to be giving off some sell signals with its 3.4x P/S ratio. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.
How Has Kratos Defense & Security Solutions Performed Recently?
Recent times haven't been great for Kratos Defense & Security Solutions as its revenue has been rising slower than most other companies. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. If not, then existing shareholders may be very nervous about the viability of the share price.
Keen to find out how analysts think Kratos Defense & Security Solutions' future stacks up against the industry? In that case, our free report is a great place to start.How Is Kratos Defense & Security Solutions' Revenue Growth Trending?
Kratos Defense & Security Solutions' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Taking a look back first, we see that the company grew revenue by an impressive 16% last year. Pleasingly, revenue has also lifted 39% 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.
Looking ahead now, revenue is anticipated to climb by 9.9% per year during the coming three years according to the twelve analysts following the company. That's shaping up to be materially higher than the 2.9% per year growth forecast for the broader industry.
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.
The Key Takeaway
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.
As we suspected, our examination of Kratos Defense & Security Solutions' analyst forecasts revealed that its superior revenue outlook is contributing to its high P/S. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless the analysts have really missed the mark, these strong revenue forecasts should keep the share price buoyant.
And what about other risks? Every company has them, and we've spotted 1 warning sign for Kratos Defense & Security Solutions you should know about.
If you're unsure about the strength of Kratos Defense & Security Solutions' 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.
