When close to half the companies in the Aerospace & Defense industry in the United States have price-to-sales ratios (or "P/S") below 2.3x, you may consider Kratos Defense & Security Solutions, Inc. (NASDAQ:KTOS) as a stock to potentially avoid with its 2.9x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

How Kratos Defense & Security Solutions Has Been Performing

Kratos Defense & Security Solutions certainly has been doing a good job lately as it's been growing revenue more than most other companies. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. If not, then existing shareholders might be a little nervous about the viability of the share price.

How Is Kratos Defense & Security Solutions' Revenue Growth Trending?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Kratos Defense & Security Solutions' 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 40% 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 twelve analysts covering the company suggest revenue should grow by 9.9% each year over the next three years. That's shaping up to be materially higher than the 2.6% per year growth forecast for the broader industry.

With this information, we can see why Kratos Defense & Security Solutions is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Bottom Line On Kratos Defense & Security Solutions' P/S

Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Kratos Defense & Security Solutions maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. It's hard to see the share price falling strongly in the near future under these circumstances.

Before you take the next step, you should know about the 2 warning signs for Kratos Defense & Security Solutions that we have uncovered.

If these risks are making you reconsider your opinion on Kratos Defense & Security Solutions, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com