Zicom Group Limited's (ASX:ZGL) price-to-sales (or "P/S") ratio of 0.1x might make it look like a strong buy right now compared to the Machinery industry in Australia, where around half of the companies have P/S ratios above 2.2x and even P/S above 55x are quite common. However, the P/S might be quite low for a reason and it requires further investigation to determine if it's justified.
See our latest analysis for Zicom Group
What Does Zicom Group's Recent Performance Look Like?
Zicom Group certainly has been doing a great job lately as it's been growing its revenue at a really rapid pace. Perhaps the market is expecting future revenue performance to dwindle, which has kept the P/S suppressed. If you like the company, you'd be hoping this isn't the case so that you could potentially pick up some stock while it's out of favour.
Although there are no analyst estimates available for Zicom Group, take a look at this free data-rich visualisation to see how the company stacks up on earnings, revenue and cash flow.
How Is Zicom Group's Revenue Growth Trending?
In order to justify its P/S ratio, Zicom Group would need to produce anemic growth that's substantially trailing the industry.
Taking a look back first, we see that the company grew revenue by an impressive 40% last year. The strong recent performance means it was also able to grow revenue by 36% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.
Weighing the recent medium-term upward revenue trajectory against the broader industry's one-year forecast for contraction of 38% shows it's a great look while it lasts.
With this information, we find it very odd that Zicom Group is trading at a P/S lower than the industry. It looks like most investors are not convinced at all that the company can maintain its recent positive growth rate in the face of a shrinking broader industry.
The Bottom Line On Zicom Group's P/S
While the price-to-sales ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of revenue expectations.
Our examination of Zicom Group revealed that despite growing revenue over the medium-term in a shrinking industry, the P/S doesn't reflect this as it's lower than the industry average. We think potential risks might be placing significant pressure on the P/S ratio and share price. The most obvious risk is that its revenue trajectory may not keep outperforming under these tough industry conditions. While the chance of the share price dropping sharply is fairly remote, investors do seem to be anticipating future revenue instability.