Yahoo Finance SATO Technologies Corp.'s (CVE:SATO) Share Price Boosted 36% But Its Business Prospects Need A Lift Too
SATO Technologies Corp. (CVE:SATO) shareholders would be excited to see that the share price has had a great month, posting a 36% gain and recovering from prior weakness. The last month tops off a massive increase of 221% in the last year.
In spite of the firm bounce in price, SATO Technologies may still be sending bullish signals at the moment with its price-to-sales (or "P/S") ratio of 2.4x, since almost half of all companies in the Software industry in Canada have P/S ratios greater than 3.2x and even P/S higher than 10x are not unusual. 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 SATO Technologies
How Has SATO Technologies Performed Recently?
SATO Technologies certainly has been doing a good job lately as it's been growing revenue more than most other companies. Perhaps the market is expecting future revenue performance to dive, which has kept the P/S suppressed. If not, then existing shareholders have reason to be quite optimistic about the future direction of the share price.
Want the full picture on analyst estimates for the company? Then our free report on SATO Technologies will help you uncover what's on the horizon.
What Are Revenue Growth Metrics Telling Us About The Low P/S?
SATO Technologies' P/S ratio would be typical for a company that's only expected to deliver limited growth, and importantly, perform worse than the industry.
Retrospectively, the last year delivered an exceptional 91% gain to the company's top line. This great performance means it was also able to deliver immense revenue growth over the last three years. Therefore, it's fair to say the revenue growth recently has been superb for the company.
Shifting to the future, estimates from the sole analyst covering the company suggest revenue growth is heading into negative territory, declining 6.6% over the next year. Meanwhile, the broader industry is forecast to expand by 19%, which paints a poor picture.
In light of this, it's understandable that SATO Technologies' P/S would sit below the majority of other companies. Nonetheless, there's no guarantee the P/S has reached a floor yet with revenue going in reverse. Even just maintaining these prices could be difficult to achieve as the weak outlook is weighing down the shares.
The Final Word
SATO Technologies' 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 SATO Technologies maintains its low P/S on the weakness of its forecast for sliding revenue, as expected. At this stage investors feel the potential for an improvement in revenue isn't great enough to justify a higher P/S ratio. It's hard to see the share price rising strongly in the near future under these circumstances.
There are also other vital risk factors to consider and we've discovered 3 warning signs for SATO Technologies (1 is concerning!) that you should be aware of before investing here.
If you're unsure about the strength of SATO Technologies' 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.
