Dialight plc (LON:DIA) Surges 86% Yet Its Low P/S Is No Reason For Excitement

The Dialight plc (LON:DIA) share price has done very well over the last month, posting an excellent gain of 86%. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

Even after such a large jump in price, Dialight may still be sending buy signals at present with its price-to-sales (or "P/S") ratio of 0.6x, considering almost half of all companies in the Electrical industry in the United Kingdom have P/S ratios greater than 1.4x and even P/S higher than 21x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

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Check out our latest analysis for Dialight

How Has Dialight Performed Recently?

Recent times haven't been great for Dialight as its revenue has been rising slower than most other companies. The P/S ratio is probably low because investors think this lacklustre revenue performance isn't going to get any better. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Dialight.

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

In order to justify its P/S ratio, Dialight would need to produce sluggish growth that's trailing the industry.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. The lack of growth did nothing to help the company's aggregate three-year performance, which is an unsavory 1.6% drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Turning to the outlook, the next three years should generate growth of 5.0% per year as estimated by the only analyst watching the company. Meanwhile, the rest of the industry is forecast to expand by 44% per year, which is noticeably more attractive.

With this in consideration, its clear as to why Dialight's P/S is falling short industry peers. It seems most investors are expecting to see limited future growth and are only willing to pay a reduced amount for the stock.

What Does Dialight's P/S Mean For Investors?

Dialight's stock price has surged recently, but its but its P/S still remains modest. 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 expected, our analysis of Dialight's analyst forecasts confirms that the company's underwhelming revenue outlook is a major contributor to its low P/S. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Dialight, and understanding should be part of your investment process.

If you're unsure about the strength of Dialight's business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.