Dotz S.A.'s (BVMF:DOTZ3) 31% Dip In Price Shows Sentiment Is Matching Revenues

The Dotz S.A. (BVMF:DOTZ3) share price has softened a substantial 31% over the previous 30 days, handing back much of the gains the stock has made lately. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 20% in that time.

After such a large drop in price, Dotz's price-to-sales (or "P/S") ratio of 0.4x might make it look like a buy right now compared to the Interactive Media and Services industry in Brazil, where around half of the companies have P/S ratios above 1.7x and even P/S above 5x are quite common. 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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Check out our latest analysis for Dotz

How Dotz Has Been Performing

Dotz has been doing a good job lately as it's been growing revenue at a solid pace. Perhaps the market is expecting this acceptable revenue performance to take a dive, which has kept the P/S suppressed. 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 out of favour.

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

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

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

Retrospectively, the last year delivered a decent 12% gain to the company's revenues. The latest three year period has also seen a 23% overall rise in revenue, aided somewhat by its short-term performance. Accordingly, shareholders would have probably been satisfied with the medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 12% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this in consideration, it's easy to understand why Dotz's P/S falls short of the mark set by its industry peers. Apparently many shareholders weren't comfortable holding on to something they believe will continue to trail the wider industry.

What We Can Learn From Dotz's P/S?

Dotz's recently weak share price has pulled its P/S back below other Interactive Media and Services companies. 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.

As we suspected, our examination of Dotz revealed its three-year revenue trends are contributing to its low P/S, given they look worse than current industry expectations. 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.

Having said that, be aware Dotz is showing 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.