The Price Is Right For Digital Bros S.p.A. (BIT:DIB) Even After Diving 25%

Digital Bros S.p.A. (BIT:DIB) shareholders won't be pleased to see that the share price has had a very rough month, dropping 25% and undoing the prior period's positive performance. Looking at the bigger picture, even after this poor month the stock is up 50% in the last year.

In spite of the heavy fall in price, when almost half of the companies in Italy's Entertainment industry have price-to-sales ratios (or "P/S") below 0.6x, you may still consider Digital Bros as a stock probably not worth researching with its 1.7x P/S ratio. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's as high as it is.

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Check out our latest analysis for Digital Bros

How Digital Bros Has Been Performing

Digital Bros could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting future revenue performance to undergo a reversal of fortunes, which has elevated the P/S ratio. However, if this isn't the case, investors might get caught out paying too much for the stock.

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

Is There Enough Revenue Growth Forecasted For Digital Bros?

There's an inherent assumption that a company should outperform the industry for P/S ratios like Digital Bros' to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 3.8%. However, this wasn't enough as the latest three year period has seen an unpleasant 8.1% overall drop in revenue. So unfortunately, we have to acknowledge that the company has not done a great job of growing revenue over that time.

Looking ahead now, revenue is anticipated to climb by 22% during the coming year according to the dual analysts following the company. That's shaping up to be materially higher than the 9.5% growth forecast for the broader industry.

With this information, we can see why Digital Bros is trading at such a high P/S compared to the industry. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Key Takeaway

Despite the recent share price weakness, Digital Bros' P/S remains higher than most other companies in the industry. We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

We've established that Digital Bros maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Entertainment industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. It's hard to see the share price falling strongly in the near future under these circumstances.

And what about other risks? Every company has them, and we've spotted 1 warning sign for Digital Bros 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.