Take Care Before Jumping Onto DIGITAL HEARTS HOLDINGS Co., Ltd. (TSE:3676) Even Though It's 32% Cheaper

DIGITAL HEARTS HOLDINGS Co., Ltd. (TSE:3676) shares have had a horrible month, losing 32% after a relatively good period beforehand. The drop over the last 30 days has capped off a tough year for shareholders, with the share price down 43% in that time.

In spite of the heavy fall in price, it would still be understandable if you think DIGITAL HEARTS HOLDINGS is a stock with good investment prospects with a price-to-sales ratios (or "P/S") of 0.4x, considering almost half the companies in Japan's IT industry have P/S ratios above 1x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

Check out our latest analysis for DIGITAL HEARTS HOLDINGS

What Does DIGITAL HEARTS HOLDINGS' Recent Performance Look Like?

DIGITAL HEARTS HOLDINGS could be doing better as it's been growing revenue less than most other companies lately. Perhaps the market is expecting the current trend of poor revenue growth to continue, which has kept the P/S suppressed. 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 DIGITAL HEARTS HOLDINGS.

What Are Revenue Growth Metrics Telling Us About The Low P/S?

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

If we review the last year of revenue growth, the company posted a worthy increase of 6.2%. This was backed up an excellent period prior to see revenue up by 71% in total over the last three years. So we can start by confirming that the company has done a great job of growing revenues over that time.

Looking ahead now, revenue is anticipated to climb by 12% per year during the coming three years according to the two analysts following the company. Meanwhile, the rest of the industry is forecast to only expand by 4.7% per year, which is noticeably less attractive.

With this in consideration, we find it intriguing that DIGITAL HEARTS HOLDINGS' P/S sits behind most of its industry peers. Apparently some shareholders are doubtful of the forecasts and have been accepting significantly lower selling prices.

The Bottom Line On DIGITAL HEARTS HOLDINGS' P/S

The southerly movements of DIGITAL HEARTS HOLDINGS' shares means its P/S is now sitting at a pretty low level. 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.

A look at DIGITAL HEARTS HOLDINGS' revenues reveals that, despite glowing future growth forecasts, its P/S is much lower than we'd expect. The reason for this depressed P/S could potentially be found in the risks the market is pricing in. While the possibility of the share price plunging seems unlikely due to the high growth forecasted for the company, the market does appear to have some hesitation.

We don't want to rain on the parade too much, but we did also find 4 warning signs for DIGITAL HEARTS HOLDINGS that you need to be mindful of.

If these risks are making you reconsider your opinion on DIGITAL HEARTS HOLDINGS, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com