Optimistic Investors Push Dogness (International) Corporation (NASDAQ:DOGZ) Shares Up 30% But Growth Is Lacking

Dogness (International) Corporation (NASDAQ:DOGZ) shares have continued their recent momentum with a 30% gain in the last month alone. The last month tops off a massive increase of 248% in the last year.

Following the firm bounce in price, you could be forgiven for thinking Dogness (International) is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 28.9x, considering almost half the companies in the United States' Luxury industry have P/S ratios below 0.8x. However, the P/S might be quite high for a reason and it requires further investigation to determine if it's justified.

See our latest analysis for Dogness (International)

What Does Dogness (International)'s Recent Performance Look Like?

For example, consider that Dogness (International)'s financial performance has been poor lately as its revenue has been in decline. One possibility is that the P/S is high because investors think the company will still do enough to outperform the broader industry in the near future. If not, then existing shareholders may be quite nervous about the viability of the share price.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Dogness (International)'s earnings, revenue and cash flow.

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 Dogness (International)'s to be considered reasonable.

Taking a look back first, the company's revenue growth last year wasn't something to get excited about as it posted a disappointing decline of 28%. The last three years don't look nice either as the company has shrunk revenue by 30% in aggregate. Accordingly, shareholders would have felt downbeat about the medium-term rates of revenue growth.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 2.5% shows it's an unpleasant look.

In light of this, it's alarming that Dogness (International)'s P/S sits above 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. Only the boldest would assume these prices are sustainable as a continuation of recent revenue trends is likely to weigh heavily on the share price eventually.

The Key Takeaway

Shares in Dogness (International) have seen a strong upwards swing lately, which has really helped boost its P/S figure. Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Our examination of Dogness (International) revealed its shrinking revenue over the medium-term isn't resulting in a P/S as low as we expected, given the industry is set to grow. With a revenue decline on investors' minds, the likelihood of a souring sentiment is quite high which could send the P/S back in line with what we'd expect. Should recent medium-term revenue trends persist, it would pose a significant risk to existing shareholders' investments and prospective investors will have a hard time accepting the current value of the stock.

You need to take note of risks, for example - Dogness (International) has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

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.