Seamless Distribution Systems AB (publ) (NGM:SDS) Held Back By Insufficient Growth Even After Shares Climb 30%

Those holding Seamless Distribution Systems AB (publ) (NGM:SDS) shares would be relieved that the share price has rebounded 30% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Unfortunately, the gains of the last month did little to right the losses of the last year with the stock still down 15% over that time.

In spite of the firm bounce in price, Seamless Distribution Systems' price-to-sales (or "P/S") ratio of 0.4x might still make it look like a buy right now compared to the Software industry in Sweden, where around half of the companies have P/S ratios above 2.3x and even P/S above 5x are quite common. 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 Seamless Distribution Systems

How Seamless Distribution Systems Has Been Performing

With revenue growth that's inferior to most other companies of late, Seamless Distribution Systems has been relatively sluggish. It seems that many are expecting the uninspiring revenue performance to persist, which has repressed the growth of the P/S ratio. If you still like the company, you'd be hoping revenue doesn't get any worse and that you could pick up some stock while it's out of favour.

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

How Is Seamless Distribution Systems' Revenue Growth Trending?

In order to justify its P/S ratio, Seamless Distribution Systems would need to produce sluggish growth that's trailing the industry.

If we review the last year of revenue growth, the company posted a worthy increase of 7.9%. Ultimately though, it couldn't turn around the poor performance of the prior period, with revenue shrinking 10% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Shifting to the future, estimates from the lone analyst covering the company suggest revenue growth is heading into negative territory, declining 0.6% per annum over the next three years. Meanwhile, the broader industry is forecast to expand by 17% each year, which paints a poor picture.

With this information, we are not surprised that Seamless Distribution Systems is trading at a P/S lower than the industry. However, shrinking revenues are unlikely to lead to a stable P/S over the longer term. There's potential for the P/S to fall to even lower levels if the company doesn't improve its top-line growth.

The Final Word

Seamless Distribution Systems' stock price has surged recently, but its but its P/S still remains modest. 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.

It's clear to see that Seamless Distribution Systems maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless there's material change, it's hard to envision a situation where the stock price will rise drastically.

Before you settle on your opinion, we've discovered 4 warning signs for Seamless Distribution Systems (2 are significant!) that you should be aware 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.