Market Cool On Cambridge Technology Enterprises Limited's (NSE:CTE) Revenues Pushing Shares 29% Lower

Cambridge Technology Enterprises Limited (NSE:CTE) shares have had a horrible month, losing 29% after a relatively good period beforehand. The recent drop has obliterated the annual return, with the share price now down 6.3% over that longer period.

After such a large drop in price, Cambridge Technology Enterprises may be sending very bullish signals at the moment with its price-to-sales (or "P/S") ratio of 0.8x, since almost half of all companies in the IT industry in India have P/S ratios greater than 3.8x and even P/S higher than 8x are not unusual. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly reduced P/S.

See our latest analysis for Cambridge Technology Enterprises

What Does Cambridge Technology Enterprises' P/S Mean For Shareholders?

The recent revenue growth at Cambridge Technology Enterprises would have to be considered satisfactory if not spectacular. One possibility is that the P/S ratio is low because investors think this good revenue growth might actually underperform the broader industry in the near future. If that doesn't eventuate, then existing shareholders may have reason to be optimistic about the future direction of the share price.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Cambridge Technology Enterprises will help you shine a light on its historical performance.

Is There Any Revenue Growth Forecasted For Cambridge Technology Enterprises?

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

If we review the last year of revenue growth, the company posted a worthy increase of 3.2%. Pleasingly, revenue has also lifted 75% in aggregate from three years ago, partly thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenues over that time.

When compared to the industry's one-year growth forecast of 7.6%, the most recent medium-term revenue trajectory is noticeably more alluring

With this information, we find it odd that Cambridge Technology Enterprises is trading at a P/S lower than the industry. Apparently some shareholders believe the recent performance has exceeded its limits and have been accepting significantly lower selling prices.

The Key Takeaway

Cambridge Technology Enterprises' P/S looks about as weak as its stock price lately. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

Our examination of Cambridge Technology Enterprises revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. At least price risks look to be very low if recent medium-term revenue trends continue, but investors seem to think future revenue could see a lot of volatility.

Having said that, be aware Cambridge Technology Enterprises is showing 3 warning signs in our investment analysis, and 2 of those shouldn't be ignored.

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.