Plurilock Security Inc. (CVE:PLUR) Might Not Be As Mispriced As It Looks After Plunging 30%

To the annoyance of some shareholders, Plurilock Security Inc. (CVE:PLUR) shares are down a considerable 30% in the last month, which continues a horrid run for the company. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 36% in that time.

Following the heavy fall in price, Plurilock Security's price-to-sales (or "P/S") ratio of 0.4x might make it look like a strong buy right now compared to the wider Software industry in Canada, where around half of the companies have P/S ratios above 3.8x and even P/S above 8x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

Check out our latest analysis for Plurilock Security

How Has Plurilock Security Performed Recently?

As an illustration, revenue has deteriorated at Plurilock Security 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. Those who are bullish on Plurilock Security will be hoping that this isn't the case so that they can pick up the stock at a lower valuation.

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 Plurilock Security's earnings, revenue and cash flow.

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as depressed as Plurilock Security's is when the company's growth is on track to lag the industry decidedly.

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 13%. Spectacularly, three year revenue growth has ballooned by several orders of magnitude, despite the drawbacks experienced in the last 12 months. Accordingly, shareholders will be pleased, but also have some serious questions to ponder about the last 12 months.

When compared to the industry's one-year growth forecast of 19%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that Plurilock Security is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

What We Can Learn From Plurilock Security's P/S?

Having almost fallen off a cliff, Plurilock Security's share price has pulled its P/S way down as well. 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're very surprised to see Plurilock Security currently trading on a much lower than expected P/S since its recent three-year growth is higher than the wider industry forecast. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 5 warning signs with Plurilock Security (at least 4 which are potentially serious), and understanding these should be part of your investment process.

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.