POSaBIT Systems Corporation (CSE:PBIT) Not Doing Enough For Some Investors As Its Shares Slump 27%

The POSaBIT Systems Corporation (CSE:PBIT) share price has softened a substantial 27% 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 45% in that time.

After such a large drop in price, considering about half the companies operating in Canada's Diversified Financial industry have price-to-sales ratios (or "P/S") above 8x, you may consider POSaBIT Systems as an great investment opportunity with its 0.5x P/S ratio. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.

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See our latest analysis for POSaBIT Systems

What Does POSaBIT Systems' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at POSaBIT Systems over the last year, which is not ideal at all. It might be that many expect the disappointing revenue performance to continue or accelerate, which has repressed the P/S. 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?

In order to justify its P/S ratio, POSaBIT Systems would need to produce anemic growth that's substantially trailing the industry.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 50%. As a result, revenue from three years ago have also fallen 53% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to deliver 36% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

With this in mind, we understand why POSaBIT Systems' P/S is lower than most of its industry peers. However, we think shrinking revenues are unlikely to lead to a stable P/S over the longer term, which could set up shareholders for future disappointment. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

What Does POSaBIT Systems' P/S Mean For Investors?

Shares in POSaBIT Systems have plummeted and its P/S has followed suit. 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 examination of POSaBIT Systems confirms that the company's shrinking revenue over the past medium-term is a key factor in its low price-to-sales ratio, given the industry is projected to grow. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises either. Unless the recent medium-term conditions improve, they will continue to form a barrier for the share price around these levels.

Before you settle on your opinion, we've discovered 4 warning signs for POSaBIT Systems that you should be aware of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.