Take Care Before Jumping Onto Directa Plus Plc (LON:DCTA) Even Though It's 33% Cheaper

To the annoyance of some shareholders, Directa Plus Plc (LON:DCTA) shares are down a considerable 33% in the last month, which continues a horrid run for the company. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 80% loss during that time.

Even after such a large drop in price, you could still be forgiven for feeling indifferent about Directa Plus' P/S ratio of 1.3x, since the median price-to-sales (or "P/S") ratio for the Chemicals industry in the United Kingdom is also close to 1.4x. 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.

View our latest analysis for Directa Plus

What Does Directa Plus' Recent Performance Look Like?

The recently shrinking revenue for Directa Plus has been in line with the industry. The P/S ratio is probably moderate because investors think the company's revenue trend will continue to follow the rest of the industry. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value. At the very least, you'd be hoping that revenue doesn't accelerate downwards if your plan is to pick up some stock while it's not in favour.

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

Is There Some Revenue Growth Forecasted For Directa Plus?

In order to justify its P/S ratio, Directa Plus would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 2.3% decrease to the company's top line. However, a few very strong years before that means that it was still able to grow revenue by an impressive 119% in total over the last three years. Accordingly, while they would have preferred to keep the run going, shareholders would definitely welcome the medium-term rates of revenue growth.

Turning to the outlook, the next year should demonstrate the company's robustness, generating growth of 47% as estimated by the two analysts watching the company. With the rest of the industry predicted to shrink by 18%, 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. It looks like most investors aren't convinced the company can achieve positive future growth in the face of a shrinking broader industry.

The Bottom Line On Directa Plus' P/S

Following Directa Plus' share price tumble, its P/S is just clinging on to the industry median P/S. 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 Directa Plus currently trades on a lower than expected P/S since its growth forecasts are potentially beating a struggling industry. Given the glowing revenue forecasts, we can only assume potential risks are what might be capping the P/S ratio at its current levels. The market could be pricing in the event that tough industry conditions will impact future revenues. At least the risk of a price drop looks to be subdued, but investors seem to think future revenue could see some volatility.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Directa Plus that you need to be mindful of.

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.

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

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.