Improved Revenues Required Before Dialight plc (LON:DIA) Stock's 27% Jump Looks Justified

Dialight plc (LON:DIA) shares have had a really impressive month, gaining 27% after a shaky period beforehand. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 18% in the last twelve months.

In spite of the firm bounce in price, Dialight's price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Electrical industry in the United Kingdom, where around half of the companies have P/S ratios above 1.4x and even P/S above 9x are quite common. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the reduced P/S.

Check out our latest analysis for Dialight

How Has Dialight Performed Recently?

Dialight could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

Keen to find out how analysts think Dialight's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Dialight's Revenue Growth Trending?

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

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 5.0%. At least revenue has managed not to go completely backwards from three years ago in aggregate, thanks to the earlier period of growth. Therefore, it's fair to say that revenue growth has been inconsistent recently for the company.

Looking ahead now, revenue is anticipated to climb by 5.4% per annum during the coming three years according to the only analyst following the company. With the industry predicted to deliver 110% growth each year, the company is positioned for a weaker revenue result.

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?

The latest share price surge wasn't enough to lift Dialight's P/S close to the industry median. 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've established that Dialight maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. It's hard to see the share price rising strongly in the near future under these circumstances.

Before you settle on your opinion, we've discovered 2 warning signs for Dialight that you should be aware of.

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.