What CSP Inc.'s (NASDAQ:CSPI) 26% Share Price Gain Is Not Telling You

CSP Inc. (NASDAQ:CSPI) shareholders have had their patience rewarded with a 26% share price jump in the last month. Not all shareholders will be feeling jubilant, since the share price is still down a very disappointing 17% in the last twelve months.

Even after such a large jump in price, it's still not a stretch to say that CSP's price-to-sales (or "P/S") ratio of 2.5x right now seems quite "middle-of-the-road" compared to the IT industry in the United States, seeing as it matches the P/S ratio of the wider industry. While this might not raise any eyebrows, if the P/S ratio is not justified investors could be missing out on a potential opportunity or ignoring looming disappointment.

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View our latest analysis for CSP

How Has CSP Performed Recently?

We'd have to say that with no tangible growth over the last year, CSP's revenue has been unimpressive. One possibility is that the P/S is moderate because investors think this benign revenue growth rate might not be enough to outperform the broader industry in the near future. Those who are bullish on CSP will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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 CSP's earnings, revenue and cash flow.

What Are Revenue Growth Metrics Telling Us About The P/S?

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

If we review the last year of revenue, the company posted a result that saw barely any deviation from a year ago. Still, the latest three year period was better as it's delivered a decent 20% overall rise in revenue. Accordingly, shareholders probably wouldn't have been overly satisfied with the unstable medium-term growth rates.

This is in contrast to the rest of the industry, which is expected to grow by 20% over the next year, materially higher than the company's recent medium-term annualised growth rates.

With this information, we find it interesting that CSP is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are less bearish than recent times would indicate and aren't willing to let go of their stock right now. They may be setting themselves up for future disappointment if the P/S falls to levels more in line with recent growth rates.

The Final Word

Its shares have lifted substantially and now CSP's P/S is back within range of the industry median. It's argued the price-to-sales ratio is an inferior measure of value within certain industries, but it can be a powerful business sentiment indicator.

We've established that CSP's average P/S is a bit surprising since its recent three-year growth is lower than the wider industry forecast. Right now we are uncomfortable with the P/S as this revenue performance isn't likely to support a more positive sentiment for long. Unless the recent medium-term conditions improve, it's hard to accept the current share price as fair value.

A lot of potential risks can sit within a company's balance sheet. You can assess many of the main risks through our free balance sheet analysis for CSP with six simple checks.

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.