Optimistic Investors Push D2L Inc. (TSE:DTOL) Shares Up 29% But Growth Is Lacking

Despite an already strong run, D2L Inc. (TSE:DTOL) shares have been powering on, with a gain of 29% in the last thirty days. The last 30 days bring the annual gain to a very sharp 82%.

Since its price has surged higher, you could be forgiven for thinking D2L is a stock not worth researching with a price-to-sales ratios (or "P/S") of 3.5x, considering almost half the companies in Canada's Consumer Services industry have P/S ratios below 2.5x. However, the P/S might be high for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for D2L

What Does D2L's P/S Mean For Shareholders?

D2L could be doing better as it's been growing revenue less than most other companies lately. It might be that many expect the uninspiring revenue performance to recover significantly, which has kept the P/S ratio from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on D2L will help you uncover what's on the horizon.

How Is D2L's Revenue Growth Trending?

The only time you'd be truly comfortable seeing a P/S as high as D2L's is when the company's growth is on track to outshine the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 12%. The latest three year period has also seen an excellent 38% overall rise in revenue, aided somewhat by its short-term performance. So we can start by confirming that the company has done a great job of growing revenues over that time.

Turning to the outlook, the next three years should generate growth of 8.7% per year as estimated by the ten analysts watching the company. With the industry predicted to deliver 20% growth per year, the company is positioned for a weaker revenue result.

With this information, we find it concerning that D2L is trading at a P/S higher than the industry. 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 Final Word

D2L's P/S is on the rise since its shares have risen strongly. 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've concluded that D2L currently trades on a much higher than expected P/S since its forecast growth is lower than the wider industry. When we see a weak revenue outlook, we suspect the share price faces a much greater risk of declining, bringing back down the P/S figures. This places shareholders' investments at significant risk and potential investors in danger of paying an excessive premium.

Don't forget that there may be other risks. For instance, we've identified 1 warning sign for D2L that you should be aware of.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.