The Market Doesn't Like What It Sees From Ignite Limited's (ASX:IGN) Revenues Yet

When close to half the companies operating in the Professional Services industry in Australia have price-to-sales ratios (or "P/S") above 1.4x, you may consider Ignite Limited (ASX:IGN) as an attractive investment with its 0.2x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

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View our latest analysis for Ignite

How Has Ignite Performed Recently?

As an illustration, revenue has deteriorated at Ignite over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. However, if this doesn't eventuate then existing shareholders may be feeling optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Ignite will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Ignite?

In order to justify its P/S ratio, Ignite would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered a frustrating 8.3% decrease to the company's top line. This means it has also seen a slide in revenue over the longer-term as revenue is down 20% in total over the last three years. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 3.7% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we are not surprised that Ignite is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

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.

Our examination of Ignite confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Ignite, and understanding these should be part of your investment process.

If you're unsure about the strength of Ignite's 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.