Envirosuite Limited (ASX:EVS) Held Back By Insufficient Growth Even After Shares Climb 72%

The Envirosuite Limited (ASX:EVS) share price has done very well over the last month, posting an excellent gain of 72%. Looking back a bit further, it's encouraging to see the stock is up 37% in the last year.

Although its price has surged higher, Envirosuite's price-to-sales (or "P/S") ratio of 2x might still make it look like a buy right now compared to the Software industry in Australia, where around half of the companies have P/S ratios above 3x and even P/S above 9x are quite common. However, the P/S might be low for a reason and it requires further investigation to determine if it's justified.

Check out our latest analysis for Envirosuite

How Has Envirosuite Performed Recently?

Envirosuite hasn't been tracking well recently as its declining revenue compares poorly to other companies, which have seen some growth in their revenues on average. It seems that many are expecting the poor revenue performance to persist, which has repressed the P/S ratio. So while you could say the stock is cheap, investors will be looking for improvement before they see it as good value.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Envirosuite.

Is There Any Revenue Growth Forecasted For Envirosuite?

There's an inherent assumption that a company should underperform the industry for P/S ratios like Envirosuite's to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's top line as the year before. Fortunately, a few good years before that means that it was still able to grow revenue by 14% in total over the last three years. So it appears to us that the company has had a mixed result in terms of growing revenue over that time.

Turning to the outlook, the next year should generate growth of 12% as estimated by the two analysts watching the company. That's shaping up to be materially lower than the 19% growth forecast for the broader industry.

With this in consideration, its clear as to why Envirosuite's P/S is falling short industry peers. Apparently many shareholders weren't comfortable holding on while the company is potentially eyeing a less prosperous future.

The Key Takeaway

The latest share price surge wasn't enough to lift Envirosuite's P/S close to 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 Envirosuite maintains its low P/S on the weakness of its forecast growth being lower than the wider industry, as expected. Right now shareholders are accepting the low P/S as they concede future revenue probably won't provide any pleasant surprises. Unless these conditions improve, they will continue to form a barrier for the share price around these levels.

We don't want to rain on the parade too much, but we did also find 4 warning signs for Envirosuite (2 shouldn't be ignored!) that you need to be mindful of.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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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.