Market Participants Recognise Digital Garage, Inc.'s (TSE:4819) Revenues Pushing Shares 25% Higher

Digital Garage, Inc. (TSE:4819) shareholders have had their patience rewarded with a 25% share price jump in the last month. Looking back a bit further, it's encouraging to see the stock is up 44% in the last year.

Following the firm bounce in price, given around half the companies in Japan's IT industry have price-to-sales ratios (or "P/S") below 1.1x, you may consider Digital Garage as a stock to avoid entirely with its 6.6x P/S ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/S.

View our latest analysis for Digital Garage

How Has Digital Garage Performed Recently?

Recent revenue growth for Digital Garage has been in line with the industry. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Want the full picture on analyst estimates for the company? Then our free report on Digital Garage will help you uncover what's on the horizon.

Do Revenue Forecasts Match The High P/S Ratio?

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

Taking a look back first, we see that the company managed to grow revenues by a handy 7.0% last year. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 31% in total over the last three years. 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 31% during the coming year according to the two analysts following the company. That's shaping up to be materially higher than the 6.9% growth forecast for the broader industry.

With this information, we can see why Digital Garage 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 Bottom Line On Digital Garage's P/S

Digital Garage's P/S has grown nicely over the last month thanks to a handy boost in the share price. 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.

Our look into Digital Garage shows that its P/S ratio remains high on the merit of its strong future revenues. 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.

A lot of potential risks can sit within a company's balance sheet. Take a look at our free balance sheet analysis for Digital Garage with six simple checks on some of these key factors.

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.