What Dominion Lending Centres Inc.'s (TSE:DLCG) 27% Share Price Gain Is Not Telling You

Dominion Lending Centres Inc. (TSE:DLCG) shares have continued their recent momentum with a 27% gain in the last month alone. The last month tops off a massive increase of 157% in the last year.

Although its price has surged higher, there still wouldn't be many who think Dominion Lending Centres' price-to-sales (or "P/S") ratio of 4.2x is worth a mention when the median P/S in Canada's Diversified Financial industry is similar at about 4.3x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for Dominion Lending Centres

How Has Dominion Lending Centres Performed Recently?

Recent times have been advantageous for Dominion Lending Centres as its revenues have been rising faster than most other companies. Perhaps the market is expecting this level of performance to taper off, keeping the P/S from soaring. If the company manages to stay the course, then investors should be rewarded with a share price that matches its revenue figures.

Keen to find out how analysts think Dominion Lending Centres' future stacks up against the industry? In that case, our free report is a great place to start.

Is There Some Revenue Growth Forecasted For Dominion Lending Centres?

There's an inherent assumption that a company should be matching the industry for P/S ratios like Dominion Lending Centres' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 16%. However, this wasn't enough as the latest three year period has seen the company endure a nasty 6.4% drop in revenue in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 19% during the coming year according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to expand by 41%, which is noticeably more attractive.

With this information, we find it interesting that Dominion Lending Centres is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. Maintaining these prices will be difficult to achieve as this level of revenue growth is likely to weigh down the shares eventually.

What Does Dominion Lending Centres' P/S Mean For Investors?

Dominion Lending Centres appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry 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.

When you consider that Dominion Lending Centres' revenue growth estimates are fairly muted compared to the broader industry, it's easy to see why we consider it unexpected to be trading at its current P/S ratio. At present, we aren't confident in the P/S as the predicted future revenues aren't likely to support a more positive sentiment for long. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 2 warning signs with Dominion Lending Centres (at least 1 which is concerning), and understanding these should be part of your investment process.

If these risks are making you reconsider your opinion on Dominion Lending Centres, 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.