Revenues Not Telling The Story For AYO Technology Solutions Limited (JSE:AYO) After Shares Rise 133%

AYO Technology Solutions Limited (JSE:AYO) shareholders would be excited to see that the share price has had a great month, posting a 133% gain and recovering from prior weakness. But the last month did very little to improve the 76% share price decline over the last year.

Although its price has surged higher, you could still be forgiven for feeling indifferent about AYO Technology Solutions' P/S ratio of 0.1x, since the median price-to-sales (or "P/S") ratio for the IT industry in South Africa is also close to 0.5x. 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.

View our latest analysis for AYO Technology Solutions

What Does AYO Technology Solutions' Recent Performance Look Like?

AYO Technology Solutions has been doing a good job lately as it's been growing revenue at a solid pace. One possibility is that the P/S is moderate because investors think this respectable revenue growth might not be enough to outperform the broader industry in the near future. Those who are bullish on AYO Technology Solutions will be hoping that this isn't the case, so that they can pick up the stock at a lower valuation.

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

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

There's an inherent assumption that a company should be matching the industry for P/S ratios like AYO Technology Solutions' to be considered reasonable.

If we review the last year of revenue growth, the company posted a terrific increase of 28%. Still, revenue has fallen 22% in total from three years ago, which is quite disappointing. Therefore, it's fair to say the revenue growth recently has been undesirable for the company.

In contrast to the company, the rest of the industry is expected to grow by 10% over the next year, which really puts the company's recent medium-term revenue decline into perspective.

With this information, we find it concerning that AYO Technology Solutions is trading at a fairly similar P/S compared to the industry. Apparently many investors in the company are way less bearish than recent times would indicate and aren't willing to let go of their stock right now. 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.

What Does AYO Technology Solutions' P/S Mean For Investors?

AYO Technology Solutions' stock has a lot of momentum behind it lately, which has brought its P/S level with the rest of the industry. 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.

We find it unexpected that AYO Technology Solutions trades at a P/S ratio that is comparable to the rest of the industry, despite experiencing declining revenues during the medium-term, while the industry as a whole is expected 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. Unless the recent medium-term conditions improve markedly, investors will have a hard time accepting the share price as fair value.

Plus, you should also learn about these 5 warning signs we've spotted with AYO Technology Solutions (including 4 which are significant).

If you're unsure about the strength of AYO Technology Solutions' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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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.