DAVOLINK Inc.'s (KOSDAQ:340360) 35% Price Boost Is Out Of Tune With Revenues

DAVOLINK Inc. (KOSDAQ:340360) shareholders would be excited to see that the share price has had a great month, posting a 35% gain and recovering from prior weakness. Looking further back, the 13% rise over the last twelve months isn't too bad notwithstanding the strength over the last 30 days.

Even after such a large jump in price, you could still be forgiven for feeling indifferent about DAVOLINK's P/S ratio of 1.4x, since the median price-to-sales (or "P/S") ratio for the Communications industry in Korea is also close to 1x. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

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View our latest analysis for DAVOLINK

How Has DAVOLINK Performed Recently?

As an illustration, revenue has deteriorated at DAVOLINK over the last year, which is not ideal at all. It might be that many expect the company to put the disappointing revenue performance behind them over the coming period, which has kept the P/S from falling. If you like the company, you'd at least be hoping this is the case so that you could potentially pick up some stock while it's not quite in favour.

Although there are no analyst estimates available for DAVOLINK, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.

Is There Some Revenue Growth Forecasted For DAVOLINK?

The only time you'd be comfortable seeing a P/S like DAVOLINK's is when the company's growth is tracking the industry closely.

In reviewing the last year of financials, we were disheartened to see the company's revenues fell to the tune of 18%. This means it has also seen a slide in revenue over the longer-term as revenue is down 10% 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.

Comparing that to the industry, which is predicted to deliver 33% growth in the next 12 months, the company's downward momentum based on recent medium-term revenue results is a sobering picture.

In light of this, it's somewhat alarming that DAVOLINK's P/S sits in line with the majority of other companies. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. 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 We Can Learn From DAVOLINK's P/S?

DAVOLINK appears to be back in favour with a solid price jump bringing its P/S back in line with 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.

The fact that DAVOLINK currently trades at a P/S on par with the rest of the industry is surprising to us since its recent revenues have been in decline over the medium-term, all while the industry is set to grow. Even though it matches the industry, we're uncomfortable with the current P/S ratio, as this dismal revenue performance is unlikely to support a more positive sentiment for long. Unless the the circumstances surrounding the recent medium-term improve, it wouldn't be wrong to expect a a difficult period ahead for the company's shareholders.

We don't want to rain on the parade too much, but we did also find 2 warning signs for DAVOLINK that you need to be mindful of.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.