What Calix Limited's (ASX:CXL) 32% Share Price Gain Is Not Telling You

Calix Limited (ASX:CXL) shareholders would be excited to see that the share price has had a great month, posting a 32% gain and recovering from prior weakness. But the last month did very little to improve the 67% share price decline over the last year.

Following the firm bounce in price, Calix may be sending bearish signals at the moment with its price-to-sales (or "P/S") ratio of 8.3x, since almost half of all companies in the Chemicals in Australia have P/S ratios under 6.4x and even P/S lower than 1.2x are not unusual. 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.

See our latest analysis for Calix

What Does Calix's P/S Mean For Shareholders?

With revenue growth that's superior to most other companies of late, Calix has been doing relatively well. It seems the market expects this form will continue into the future, hence the elevated P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

Want the full picture on analyst estimates for the company? Then our free report on Calix will help you uncover what's on the horizon.

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

Calix's 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 30% last year. Revenue has also lifted 26% in aggregate from three years ago, mostly thanks to the last 12 months of growth. Therefore, it's fair to say the revenue growth recently has been respectable for the company.

Looking ahead now, revenue is anticipated to climb by 44% each year during the coming three years according to the three analysts following the company. With the industry predicted to deliver 527% growth per annum, the company is positioned for a weaker revenue result.

With this in consideration, we believe it doesn't make sense that Calix's P/S is outpacing its industry peers. It seems most investors are hoping for a turnaround in the company's business prospects, but the analyst cohort is not so confident this will happen. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Calix's P/S is on the rise since its shares have risen strongly. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

It comes as a surprise to see Calix trade at such a high P/S given the revenue forecasts look less than stellar. Right now we aren't comfortable with the high P/S as the predicted future revenues aren't likely to support such positive sentiment for long. At these price levels, investors should remain cautious, particularly if things don't improve.

You should always think about risks. Case in point, we've spotted 2 warning signs for Calix you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.