Dye & Durham Limited (TSE:DND) Surges 26% Yet Its Low P/S Is No Reason For Excitement

Despite an already strong run, Dye & Durham Limited (TSE:DND) shares have been powering on, with a gain of 26% in the last thirty days. The last month tops off a massive increase of 141% in the last year.

Although its price has surged higher, Dye & Durham may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 2.8x, considering almost half of all companies in the Software industry in Canada have P/S ratios greater than 3.9x and even P/S higher than 8x aren't out of the ordinary. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

View our latest analysis for Dye & Durham

How Dye & Durham Has Been Performing

Recent times haven't been great for Dye & Durham as its revenue has been rising slower than most other companies. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dye & Durham.

Do Revenue Forecasts Match The Low P/S Ratio?

In order to justify its P/S ratio, Dye & Durham would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period has seen an excellent 119% overall rise in revenue, in spite of its uninspiring short-term performance. Therefore, it's fair to say the revenue growth recently has been great for the company, but investors will want to ask why it has slowed to such an extent.

Turning to the outlook, the next three years should generate growth of 9.5% per year as estimated by the seven analysts watching the company. Meanwhile, the rest of the industry is forecast to expand by 20% per annum, which is noticeably more attractive.

With this information, we can see why Dye & Durham is trading at a P/S lower than the industry. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Final Word

The latest share price surge wasn't enough to lift Dye & Durham's P/S close to the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that Dye & Durham maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Shareholders' pessimism on the revenue prospects for the company seems to be the main contributor to the depressed P/S. The company will need a change of fortune to justify the P/S rising higher in the future.

Before you settle on your opinion, we've discovered 1 warning sign for Dye & Durham that you should be aware of.

If these risks are making you reconsider your opinion on Dye & Durham, 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.