BuildDirect.com Technologies Inc.'s (CVE:BILD) Shares Bounce 77% But Its Business Still Trails The Industry

Despite an already strong run, BuildDirect.com Technologies Inc. (CVE:BILD) shares have been powering on, with a gain of 77% in the last thirty days. The last 30 days bring the annual gain to a very sharp 47%.

Although its price has surged higher, given about half the companies operating in Canada's Specialty Retail industry have price-to-sales ratios (or "P/S") above 1.4x, you may still consider BuildDirect.com Technologies as an attractive investment with its 0.5x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

See our latest analysis for BuildDirect.com Technologies

What Does BuildDirect.com Technologies' Recent Performance Look Like?

For instance, BuildDirect.com Technologies' receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is low because investors think the company won't do enough to avoid underperforming the broader industry in the near future. 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.

Although there are no analyst estimates available for BuildDirect.com Technologies, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

How Is BuildDirect.com Technologies' Revenue Growth Trending?

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

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 15%. As a result, revenue from three years ago have also fallen 20% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 15% shows it's an unpleasant look.

With this in mind, we understand why BuildDirect.com Technologies' 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. Even just maintaining these prices could be difficult to achieve as recent revenue trends are already weighing down the shares.

The Key Takeaway

Despite BuildDirect.com Technologies' share price climbing recently, its P/S still lags most other companies. 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.

As we suspected, our examination of BuildDirect.com Technologies revealed its shrinking revenue over the medium-term is contributing to its low P/S, given the industry is set to grow. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. Given the current circumstances, it seems unlikely that the share price will experience any significant movement in either direction in the near future if recent medium-term revenue trends persist.

You need to take note of risks, for example - BuildDirect.com Technologies has 2 warning signs (and 1 which is concerning) we think you should know about.

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.