It's Down 31% But POSaBIT Systems Corporation (CSE:PBIT) Could Be Riskier Than It Looks

To the annoyance of some shareholders, POSaBIT Systems Corporation (CSE:PBIT) shares are down a considerable 31% in the last month, which continues a horrid run for the company. For any long-term shareholders, the last month ends a year to forget by locking in a 83% share price decline.

Since its price has dipped substantially, POSaBIT Systems may look like a strong buying opportunity at present with its price-to-sales (or "P/S") ratio of 0.3x, considering almost half of all companies in the Diversified Financial industry in Canada have P/S ratios greater than 3.2x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so limited.

See our latest analysis for POSaBIT Systems

What Does POSaBIT Systems' Recent Performance Look Like?

Recent times have been quite advantageous for POSaBIT Systems as its revenue has been rising very briskly. It might be that many expect the strong revenue performance to degrade substantially, which has repressed the P/S ratio. 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.

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 POSaBIT Systems' earnings, revenue and cash flow.

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

There's an inherent assumption that a company should far underperform the industry for P/S ratios like POSaBIT Systems' to be considered reasonable.

Taking a look back first, we see that the company grew revenue by an impressive 103% last year. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, thanks in part to the last 12 months of revenue growth. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

This is in contrast to the rest of the industry, which is expected to grow by 33% over the next year, materially lower than the company's recent medium-term annualised growth rates.

In light of this, it's peculiar that POSaBIT Systems' P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Final Word

Having almost fallen off a cliff, POSaBIT Systems' share price has pulled its P/S way down as well. 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.

Our examination of POSaBIT Systems revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. It appears many are indeed anticipating revenue instability, because the persistence of these recent medium-term conditions would normally provide a boost to the share price.

And what about other risks? Every company has them, and we've spotted 3 warning signs for POSaBIT Systems you should know about.

If these risks are making you reconsider your opinion on POSaBIT Systems, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.