De.mem Limited (ASX:DEM) Might Not Be As Mispriced As It Looks

It's not a stretch to say that De.mem Limited's (ASX:DEM) price-to-sales (or "P/S") ratio of 2x right now seems quite "middle-of-the-road" for companies in the Water Utilities industry in Australia, where the median P/S ratio is around 2.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

Check out our latest analysis for De.mem

What Does De.mem's P/S Mean For Shareholders?

Revenue has risen firmly for De.mem recently, which is pleasing to see. Perhaps the market is expecting future revenue performance to only keep up with the broader industry, which has keeping the P/S in line with expectations. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for De.mem, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is De.mem's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like De.mem's is when the company's growth is tracking the industry closely.

If we review the last year of revenue growth, the company posted a worthy increase of 8.7%. Pleasingly, revenue has also lifted 94% in aggregate from three years ago, partly 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 9.9% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's curious that De.mem's P/S sits in line with the majority of other companies. It may be that most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We didn't quite envision De.mem's P/S sitting in line with the wider industry, considering the revenue growth over the last three-year is higher than the current industry outlook. There could be some unobserved threats to revenue preventing the P/S ratio from matching this positive performance. At least the risk of a price drop looks to be subdued if recent medium-term revenue trends continue, but investors seem to think future revenue could see some volatility.

We don't want to rain on the parade too much, but we did also find 2 warning signs for De.mem that you need to be mindful 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.