Optimistic Investors Push CI Systems (Israel) Ltd. (TLV:CISY) Shares Up 27% But Growth Is Lacking

Despite an already strong run, CI Systems (Israel) Ltd. (TLV:CISY) shares have been powering on, with a gain of 27% in the last thirty days. Looking back a bit further, it's encouraging to see the stock is up 69% in the last year.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about CI Systems (Israel)'s P/S ratio of 2.7x, since the median price-to-sales (or "P/S") ratio for the Semiconductor industry in Israel is also close to 3.1x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

Check out our latest analysis for CI Systems (Israel)

What Does CI Systems (Israel)'s P/S Mean For Shareholders?

For example, consider that CI Systems (Israel)'s financial performance has been poor lately as its revenue has been in decline. Perhaps investors believe the recent revenue performance is enough to keep in line with the industry, which is keeping the P/S from dropping off. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on CI Systems (Israel)'s earnings, revenue and cash flow.

Do Revenue Forecasts Match The P/S Ratio?

CI Systems (Israel)'s P/S ratio would be typical for a company that's only expected to deliver moderate growth, and importantly, perform in line with the industry.

Retrospectively, the last year delivered a frustrating 11% decrease to the company's top line. Regardless, revenue has managed to lift by a handy 29% in aggregate from three years ago, thanks to the earlier period of growth. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Comparing that to the industry, which is predicted to deliver 7,865% growth in the next 12 months, the company's momentum is weaker, based on recent medium-term annualised revenue results.

In light of this, it's curious that CI Systems (Israel)'s P/S sits in line with the majority of other companies. It seems most investors are ignoring the fairly limited recent growth rates and are willing to pay up for exposure to the stock. Maintaining these prices will be difficult to achieve as a continuation of recent revenue trends is likely to weigh down the shares eventually.

The Key Takeaway

Its shares have lifted substantially and now CI Systems (Israel)'s P/S is back within range of the industry median. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

Our examination of CI Systems (Israel) revealed its poor three-year revenue trends aren't resulting in a lower P/S as per our expectations, given they look worse than current industry outlook. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. If recent medium-term revenue trends continue, the probability of a share price decline will become quite substantial, placing shareholders at risk.

And what about other risks? Every company has them, and we've spotted 3 warning signs for CI Systems (Israel) (of which 1 is a bit unpleasant!) 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.