Directa Plus Plc's (LON:DCTA) P/S Still Appears To Be Reasonable
When you see that almost half of the companies in the Chemicals industry in the United Kingdom have price-to-sales ratios (or "P/S") below 2x, Directa Plus Plc (LON:DCTA) looks to be giving off some sell signals with its 3.5x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.
Check out our latest analysis for Directa Plus
What Does Directa Plus' P/S Mean For Shareholders?
Recent times have been pleasing for Directa Plus as its revenue has risen in spite of the industry's average revenue going into reverse. The P/S ratio is probably high because investors think the company will continue to navigate the broader industry headwinds better than most. If not, then existing shareholders might be a little nervous about the viability of the share price.
If you'd like to see what analysts are forecasting going forward, you should check out our free report on Directa Plus.
Do Revenue Forecasts Match The High P/S Ratio?
Directa Plus' P/S ratio would be typical for a company that's expected to deliver solid growth, and importantly, perform better than the industry.
Retrospectively, the last year delivered an exceptional 26% gain to the company's top line. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.
Turning to the outlook, the next three years should demonstrate the company's robustness, generating growth of 39% per annum as estimated by the dual analysts watching the company. With the rest of the industry predicted to shrink by 1.6% each year, that would be a fantastic result.
With this information, we can see why Directa Plus is trading at such a high P/S compared to the industry. Right now, investors are willing to pay more for a stock that is shaping up to buck the trend of the broader industry going backwards.
What Does Directa Plus' P/S Mean For Investors?
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.
As we suspected, our examination of Directa Plus' analyst forecasts revealed that its superior revenue outlook against a shaky industry is contributing to its high P/S. Outperforming the industry in this manner looks to have provided investors with a bit of confidence that the future will be bright, bolstering the P/S. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Assuming the company's outlook remains unchanged, the share price is likely to be supported by prospective buyers.
There are also other vital risk factors to consider before investing and we've discovered 1 warning sign for Directa Plus that you should be aware of.
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.
