DUG Technology Ltd (ASX:DUG) Stock Rockets 82% As Investors Are Less Pessimistic Than Expected

Despite an already strong run, DUG Technology Ltd (ASX:DUG) shares have been powering on, with a gain of 82% in the last thirty days. Notwithstanding the latest gain, the annual share price return of 9.6% isn't as impressive.

In spite of the firm bounce in price, it's still not a stretch to say that DUG Technology's price-to-sales (or "P/S") ratio of 3.7x right now seems quite "middle-of-the-road" compared to the Software industry in Australia, where the median P/S ratio is around 3.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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See our latest analysis for DUG Technology

How Has DUG Technology Performed Recently?

While the industry has experienced revenue growth lately, DUG Technology's revenue has gone into reverse gear, which is not great. Perhaps the market is expecting its poor revenue performance to improve, keeping the P/S from dropping. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on DUG Technology.

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 DUG Technology's to be considered reasonable.

Retrospectively, the last year delivered a frustrating 4.5% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 85% in total over the last three years. Although it's been a bumpy ride, it's still fair to say the revenue growth recently has been more than adequate for the company.

Shifting to the future, estimates from the seven analysts covering the company suggest revenue should grow by 19% each year over the next three years. Meanwhile, the rest of the industry is forecast to expand by 50% each year, which is noticeably more attractive.

With this information, we find it interesting that DUG Technology is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What We Can Learn From DUG Technology's P/S?

Its shares have lifted substantially and now DUG Technology's P/S is back within range of the industry median. 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.

Our look at the analysts forecasts of DUG Technology's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with DUG Technology, and understanding should be part of your investment process.

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.