Digitalist Group Plc (HEL:DIGIGR) Stocks Pounded By 25% But Not Lagging Industry On Growth Or Pricing

Digitalist Group Plc (HEL:DIGIGR) shares have retraced a considerable 25% in the last month, reversing a fair amount of their solid recent performance. Regardless, last month's decline is barely a blip on the stock's price chart as it has gained a monstrous 344% in the last year.

In spite of the heavy fall in price, given close to half the companies operating in Finland's IT industry have price-to-sales ratios (or "P/S") below 0.7x, you may still consider Digitalist Group as a stock to potentially avoid with its 1.4x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the elevated P/S.

We've discovered 4 warning signs about Digitalist Group. View them for free.

Check out our latest analysis for Digitalist Group

How Has Digitalist Group Performed Recently?

For instance, Digitalist Group's receding revenue in recent times would have to be some food for thought. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

What Are Revenue Growth Metrics Telling Us About The High P/S?

The only time you'd be truly comfortable seeing a P/S as high as Digitalist Group's is when the company's growth is on track to outshine the industry.

Retrospectively, the last year delivered a frustrating 3.2% decrease to the company's top line. As a result, revenue from three years ago have also fallen 13% overall. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Comparing that to the industry, which is predicted to shrink 24% in the next 12 months, the company's downward momentum is still superior based on recent medium-term annualised revenue results.

With this information, it might not be hard to see why Digitalist Group is trading at a higher P/S in comparison. Nonetheless, there's no guarantee the P/S has found a floor yet with recent revenue going backwards, despite the industry heading down even harder. There is potential for the P/S to fall to lower levels if the company doesn't improve its top-line growth, which would be difficult to do with the current industry outlook.

The Final Word

Digitalist Group's P/S remain high even after its stock plunged. While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.

As we suspected, our examination of Digitalist Group revealed its narrower three-year contraction in revenue is contributing to its higher than industry P/S, given the industry is set to shrink even more. Right now shareholders are comfortable with the P/S as they are quite confident revenue aren't under any additional threat. Our only concern is whether its revenue trajectory can keep outperforming under these tough industry conditions. Although, if the company's relative outperformance doesn't change it will continue to provide strong support to the share price.

Plus, you should also learn about these 4 warning signs we've spotted with Digitalist Group (including 3 which don't sit too well with us).

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.