Digital Garage, Inc.'s (TSE:4819) P/S Still Appears To Be Reasonable

Digital Garage, Inc.'s (TSE:4819) price-to-sales (or "P/S") ratio of 4.9x may look like a poor investment opportunity when you consider close to half the companies in the IT industry in Japan have P/S ratios below 1.2x. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

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Check out our latest analysis for Digital Garage

How Has Digital Garage Performed Recently?

Digital Garage could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. One possibility is that the P/S ratio is high because investors think this poor revenue performance will turn the corner. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

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How Is Digital Garage's Revenue Growth Trending?

Digital Garage's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

Retrospectively, the last year delivered a frustrating 2.5% decrease to the company's top line. As a result, revenue from three years ago have also fallen 47% overall. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Looking ahead now, revenue is anticipated to climb by 19% per annum during the coming three years according to the dual analysts following the company. With the industry only predicted to deliver 5.3% per year, the company is positioned for a stronger revenue result.

With this information, we can see why Digital Garage is trading at such a high P/S compared to the industry. Apparently shareholders aren't keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

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 look into Digital Garage shows that its P/S ratio remains high on the merit of its strong future revenues. Right now shareholders are comfortable with the P/S as they are quite confident future revenues aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

You should always think about risks. Case in point, we've spotted 1 warning sign for Digital Garage you should be aware of.

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.