CAICA DIGITAL Inc. (TSE:2315) Investors Are Less Pessimistic Than Expected

With a median price-to-sales (or "P/S") ratio of close to 1.1x in the IT industry in Japan, you could be forgiven for feeling indifferent about CAICA DIGITAL Inc.'s (TSE:2315) P/S ratio of 1.2x. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

View our latest analysis for CAICA DIGITAL

What Does CAICA DIGITAL's Recent Performance Look Like?

Revenue has risen at a steady rate over the last year for CAICA DIGITAL, which is generally not a bad outcome. It might be that many expect the respectable revenue performance to only match most other companies over the coming period, which has kept the P/S from rising. If not, then at least existing shareholders probably aren't too pessimistic about the future direction of the share price.

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 CAICA DIGITAL's earnings, revenue and cash flow.

How Is CAICA DIGITAL's Revenue Growth Trending?

There's an inherent assumption that a company should be matching the industry for P/S ratios like CAICA DIGITAL's to be considered reasonable.

If we review the last year of revenue growth, the company posted a worthy increase of 6.1%. However, this wasn't enough as the latest three year period has seen an unpleasant 2.9% overall drop in revenue. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 6.7% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this in mind, we find it worrying that CAICA DIGITAL's P/S exceeds that of its industry peers. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. There's a good chance existing shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the recent negative growth rates.

What Does CAICA DIGITAL's P/S Mean For Investors?

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.

We find it unexpected that CAICA DIGITAL trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

Having said that, be aware CAICA DIGITAL is showing 4 warning signs in our investment analysis, and 2 of those are significant.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.