Digitalist Group Plc's (HEL:DIGIGR) 36% Share Price Surge Not Quite Adding Up

Digitalist Group Plc (HEL:DIGIGR) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The annual gain comes to 102% following the latest surge, making investors sit up and take notice.

Although its price has surged higher, you could still be forgiven for feeling indifferent about Digitalist Group's P/S ratio of 0.7x, since the median price-to-sales (or "P/S") ratio for the IT industry in Finland is also close to 0.8x. 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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View our latest analysis for Digitalist Group

What Does Digitalist Group's Recent Performance Look Like?

As an illustration, revenue has deteriorated at Digitalist Group over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If not, then existing shareholders may be a little nervous about the viability of the share price.

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.

Is There Some Revenue Growth Forecasted For Digitalist Group?

The only time you'd be comfortable seeing a P/S like Digitalist Group's is when the company's growth is tracking the industry closely.

Retrospectively, the last year delivered a frustrating 3.2% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 13% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for a contraction of 0.4% shows the industry is more attractive on an annualised basis regardless.

With this information, it's perhaps strange that Digitalist Group is trading at a fairly similar P/S in comparison. With revenue going quickly in reverse, it's not guaranteed that the P/S has found a floor yet. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Digitalist Group'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.

We've established that Digitalist Group currently trades on a higher than expected P/S since its recent three-year revenues are even worse than the forecasts for a struggling industry. When we see below average revenue, we suspect the share price is at risk of declining, sending the moderate P/S lower. We're also cautious about the company's ability to stay its recent medium-term course and resist even greater pain to its business from the broader industry turmoil. Unless the company's relative performance improves, it's challenging to accept these prices as being reasonable.

Plus, you should also learn about these 4 warning signs we've spotted with Digitalist Group (including 3 which are a bit unpleasant).

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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.