Revenues Working Against ZOO Digital Group plc's (LON:ZOO) Share Price Following 37% Dive

ZOO Digital Group plc (LON:ZOO) shares have retraced a considerable 37% in the last month, reversing a fair amount of their solid recent performance. The recent drop completes a disastrous twelve months for shareholders, who are sitting on a 76% loss during that time.

Since its price has dipped substantially, ZOO Digital Group may be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.9x, since almost half of all companies in the Software industry in the United Kingdom have P/S ratios greater than 2.6x and even P/S higher than 5x are not unusual. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

View our latest analysis for ZOO Digital Group

What Does ZOO Digital Group's P/S Mean For Shareholders?

ZOO Digital Group could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. The P/S ratio is probably low because investors think this poor revenue performance isn't going to get any better. If this is the case, then existing shareholders will probably struggle to get excited about the future direction of the share price.

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

Do Revenue Forecasts Match The Low P/S Ratio?

The only time you'd be truly comfortable seeing a P/S as low as ZOO Digital Group's is when the company's growth is on track to lag the industry.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 37%. However, a few very strong years before that means that it was still able to grow revenue by an impressive 89% 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.

Looking ahead now, revenue is anticipated to slump, contracting by 8.6% during the coming year according to the four analysts following the company. That's not great when the rest of the industry is expected to grow by 10%.

With this information, we are not surprised that ZOO Digital Group is trading at a P/S lower than the industry. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Bottom Line On ZOO Digital Group's P/S

ZOO Digital Group's P/S has taken a dip along with its share price. 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.

It's clear to see that ZOO Digital Group maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. As other companies in the industry are forecasting revenue growth, ZOO Digital Group's poor outlook justifies its low P/S ratio. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

You need to take note of risks, for example - ZOO Digital Group has 4 warning signs (and 1 which is concerning) we think you should know about.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.