DATA MODUL Aktiengesellschaft Produktion und Vertrieb von elektronischen Systemen's (ETR:DAM) 26% Share Price Surge Not Quite Adding Up

DATA MODUL Aktiengesellschaft Produktion und Vertrieb von elektronischen Systemen (ETR:DAM) shareholders have had their patience rewarded with a 26% share price jump in the last month. Unfortunately, despite the strong performance over the last month, the full year gain of 2.1% isn't as attractive.

Although its price has surged higher, you could still be forgiven for feeling indifferent about DATA MODUL Produktion und Vertrieb von elektronischen Systemen's P/S ratio of 0.5x, since the median price-to-sales (or "P/S") ratio for the Electronic industry in Germany is also close to 0.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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How DATA MODUL Produktion und Vertrieb von elektronischen Systemen Has Been Performing

DATA MODUL Produktion und Vertrieb von elektronischen Systemen hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. One possibility is that the P/S ratio is moderate because investors think this poor revenue performance will turn around. You'd really hope so, otherwise you're paying a relatively elevated price for a company with this sort of growth profile.

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How Is DATA MODUL Produktion und Vertrieb von elektronischen Systemen's Revenue Growth Trending?

The only time you'd be comfortable seeing a P/S like DATA MODUL Produktion und Vertrieb von elektronischen Systemen's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 15% decrease to the company's top line. As a result, revenue from three years ago have also fallen 5.0% overall. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 4.7% per annum during the coming three years according to the only analyst following the company. That's shaping up to be materially lower than the 7.3% each year growth forecast for the broader industry.

With this information, we find it interesting that DATA MODUL Produktion und Vertrieb von elektronischen Systemen 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. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

DATA MODUL Produktion und Vertrieb von elektronischen Systemen's stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

Our look at the analysts forecasts of DATA MODUL Produktion und Vertrieb von elektronischen Systemen's revenue prospects has shown that its inferior revenue outlook isn't negatively impacting its P/S as much as we would have predicted. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for DATA MODUL Produktion und Vertrieb von elektronischen Systemen with six simple checks.

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.