Jatcorp Limited (ASX:JAT) Might Not Be As Mispriced As It Looks After Plunging 25%

Jatcorp Limited (ASX:JAT) shareholders that were waiting for something to happen have been dealt a blow with a 25% share price drop in the last month. Looking at the bigger picture, even after this poor month the stock is up 57% in the last year.

Even after such a large drop in price, there still wouldn't be many who think Jatcorp's price-to-sales (or "P/S") ratio of 0.9x is worth a mention when the median P/S in Australia's Retail Distributors industry is similar at about 0.7x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

View our latest analysis for Jatcorp

What Does Jatcorp's Recent Performance Look Like?

With revenue growth that's exceedingly strong of late, Jatcorp has been doing very well. The P/S is probably moderate because investors think this strong revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on Jatcorp will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Jatcorp's earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Jatcorp's to be considered reasonable.

Retrospectively, the last year delivered an exceptional 42% gain to the company's top line. Pleasingly, revenue has also lifted 150% 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.

Comparing that to the industry, which is only predicted to deliver 5.5% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

With this information, we find it interesting that Jatcorp is trading at a fairly similar P/S compared to the industry. It may be that most investors are not convinced the company can maintain its recent growth rates.

What Does Jatcorp's P/S Mean For Investors?

With its share price dropping off a cliff, the P/S for Jatcorp looks to be in line with the rest of the Retail Distributors industry. 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.

We've established that Jatcorp currently trades on a lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. It'd be fair to assume that potential risks the company faces could be the contributing factor to the lower than expected P/S. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to see the likelihood of revenue fluctuations in the future.

We don't want to rain on the parade too much, but we did also find 1 warning sign for Jatcorp that you need to be mindful of.

If you're unsure about the strength of Jatcorp'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.