Davis Commodities Limited's (NASDAQ:DTCK) 64% Share Price Surge Not Quite Adding Up

Those holding Davis Commodities Limited (NASDAQ:DTCK) shares would be relieved that the share price has rebounded 64% in the last thirty days, but it needs to keep going to repair the recent damage it has caused to investor portfolios. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 22% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that Davis Commodities' price-to-sales (or "P/S") ratio of 0.2x right now seems quite "middle-of-the-road" compared to the Consumer Retailing industry in the United States, where the median P/S ratio is around 0.5x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

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View our latest analysis for Davis Commodities

What Does Davis Commodities' P/S Mean For Shareholders?

As an illustration, revenue has deteriorated at Davis Commodities 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.

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on Davis Commodities will help you shine a light on its historical performance.

Is There Some Revenue Growth Forecasted For Davis Commodities?

In order to justify its P/S ratio, Davis Commodities would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 31% decrease to the company's top line. The last three years don't look nice either as the company has shrunk revenue by 32% in aggregate. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

Weighing that medium-term revenue trajectory against the broader industry's one-year forecast for expansion of 5.6% shows it's an unpleasant look.

With this information, we find it concerning that Davis Commodities is trading at a fairly similar P/S compared to the industry. 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 on the share price eventually.

The Final Word

Its shares have lifted substantially and now Davis Commodities' P/S is back within range of the industry median. 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 at Davis Commodities revealed its shrinking revenues over the medium-term haven't impacted the P/S as much as we anticipated, given the industry is set to grow. When we see revenue heading backwards in the context of growing industry forecasts, it'd make sense to expect a possible share price decline on the horizon, sending the moderate P/S lower. If recent medium-term revenue trends continue, it will place shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

We don't want to rain on the parade too much, but we did also find 3 warning signs for Davis Commodities (2 shouldn't be ignored!) that you need to be mindful of.

If strong companies turning a profit tickle your fancy, then you'll want to check out this free list of interesting companies that trade on a low P/E (but have proven they can grow earnings).

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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.