A Piece Of The Puzzle Missing From Directa Plus Plc's (LON:DCTA) Share Price

There wouldn't be many who think Directa Plus Plc's (LON:DCTA) price-to-sales (or "P/S") ratio of 1.2x is worth a mention when the median P/S for the Chemicals industry in the United Kingdom is similar at about 1.5x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

See our latest analysis for Directa Plus

What Does Directa Plus' P/S Mean For Shareholders?

Directa Plus certainly has been doing a good job lately as its revenue growth has been positive while most other companies have been seeing their revenue go backwards. One possibility is that the P/S ratio is moderate because investors think the company's revenue will be less resilient moving forward. Those who are bullish on Directa Plus will be hoping that this isn't the case, so that they can pick up the stock at a slightly lower valuation.

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

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

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

Taking a look back first, we see that there was hardly any revenue growth to speak of for the company over the past year. However, a few strong years before that means that it was still able to grow revenue by an impressive 69% in total over the last three years. Accordingly, shareholders will be pleased, but also have some questions to ponder about the last 12 months.

Looking ahead now, revenue is anticipated to remain buoyant, climbing by 57% each year during the coming three years according to the two analysts following the company. With the rest of the industry predicted to shrink by 1.9% each year, that would be a fantastic result.

In light of this, it's peculiar that Directa Plus' P/S sits in-line with the majority of other companies. Apparently some shareholders are skeptical of the contrarian forecasts and have been accepting lower selling prices.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

We've established that Directa Plus currently trades on a lower than expected P/S since its growth forecasts are potentially beating a struggling industry. We assume that investors are attributing some risk to the company's future revenues, keeping it from trading at a higher P/S. Perhaps there is some hesitation about the company's ability to keep swimming against the current of the broader industry turmoil. However, if you agree with the analysts' forecasts, you may be able to pick up the stock at an attractive price.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Directa Plus you should know about.

If companies with solid past earnings growth is up your alley, you may wish to see this free collection of other companies with strong earnings growth and low P/E ratios.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com