Credit Clear Limited's (ASX:CCR) Share Price Could Signal Some Risk

There wouldn't be many who think Credit Clear Limited's (ASX:CCR) price-to-sales (or "P/S") ratio of 2.8x is worth a mention when the median P/S for the Software industry in Australia is similar at about 2.6x. However, investors might be overlooking a clear opportunity or potential setback if there is no rational basis for the P/S.

View our latest analysis for Credit Clear

How Credit Clear Has Been Performing

With revenue growth that's inferior to most other companies of late, Credit Clear has been relatively sluggish. Perhaps the market is expecting future revenue performance to lift, which has kept the P/S from declining. If not, then existing shareholders may be a little nervous about the viability of the share price.

Keen to find out how analysts think Credit Clear's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Credit Clear's Revenue Growth Trending?

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

Taking a look back first, we see that the company grew revenue by an impressive 16% last year. The strong recent performance means it was also able to grow revenue by 279% in total over the last three years. Accordingly, shareholders would have definitely welcomed those medium-term rates of revenue growth.

Looking ahead now, revenue is anticipated to climb by 15% each year during the coming three years according to the one analyst following the company. With the industry predicted to deliver 20% growth each year, the company is positioned for a weaker revenue result.

With this in mind, we find it intriguing that Credit Clear's P/S is closely matching its industry peers. Apparently many investors in the company are less bearish than analysts indicate and aren't willing to let go of their stock right now. These shareholders may be setting themselves up for future disappointment if the P/S falls to levels more in line with the growth outlook.

The Key Takeaway

Typically, we'd caution against reading too much into price-to-sales ratios when settling on investment decisions, though it can reveal plenty about what other market participants think about the company.

Given that Credit Clear's revenue growth projections are relatively subdued in comparison to the wider industry, it comes as a surprise to see it trading at its current P/S ratio. When we see companies with a relatively weaker revenue outlook compared to the industry, we suspect the share price is at risk of declining, sending the moderate P/S lower. This places shareholders' investments at risk and potential investors in danger of paying an unnecessary premium.

It is also worth noting that we have found 1 warning sign for Credit Clear that you need to take into consideration.

If these risks are making you reconsider your opinion on Credit Clear, explore our interactive list of high quality stocks to get an idea of what else is out there.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com