It's Down 26% But Gatekeeper Systems Inc. (CVE:GSI) Could Be Riskier Than It Looks

To the annoyance of some shareholders, Gatekeeper Systems Inc. (CVE:GSI) shares are down a considerable 26% 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 34% in that time.

Since its price has dipped substantially, Gatekeeper Systems' price-to-sales (or "P/S") ratio of 1.1x might make it look like a buy right now compared to the Electronic industry in Canada, where around half of the companies have P/S ratios above 2.9x and even P/S above 7x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for Gatekeeper Systems

How Has Gatekeeper Systems Performed Recently?

Revenue has risen firmly for Gatekeeper Systems recently, which is pleasing to see. It might be that many expect the respectable revenue performance to degrade substantially, which has repressed the P/S. If that doesn't eventuate, then existing shareholders have reason to be optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Gatekeeper Systems will help you shine a light on its historical performance.

How Is Gatekeeper Systems' Revenue Growth Trending?

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

Retrospectively, the last year delivered a decent 7.6% gain to the company's revenues. Pleasingly, revenue has also lifted 136% in aggregate from three years ago, partly thanks to the last 12 months of growth. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Comparing that to the industry, which is only predicted to deliver 12% growth in the next 12 months, the company's momentum is stronger based on recent medium-term annualised revenue results.

In light of this, it's peculiar that Gatekeeper Systems' P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Key Takeaway

The southerly movements of Gatekeeper Systems' shares means its P/S is now sitting at a pretty low level. Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We're very surprised to see Gatekeeper Systems 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 strong revenue with faster-than-industry growth, we assume there are some significant underlying risks to the company's ability to make money which is applying downwards pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

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

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.