It's A Story Of Risk Vs Reward With Novatti Group Limited (ASX:NOV)

You may think that with a price-to-sales (or "P/S") ratio of 1x Novatti Group Limited (ASX:NOV) is a stock worth checking out, seeing as almost half of all the Software companies in Australia have P/S ratios greater than 2.5x and even P/S higher than 6x aren't out of the ordinary. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's limited.

View our latest analysis for Novatti Group

What Does Novatti Group's P/S Mean For Shareholders?

With revenue growth that's exceedingly strong of late, Novatti Group has been doing very well. One possibility is that the P/S ratio is low because investors think this strong revenue growth might actually underperform the broader industry in the near future. 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.

We don't have analyst forecasts, but you can see how recent trends are setting up the company for the future by checking out our free report on Novatti Group's earnings, revenue and cash flow.

How Is Novatti Group's Revenue Growth Trending?

In order to justify its P/S ratio, Novatti Group would need to produce sluggish growth that's trailing the industry.

Taking a look back first, we see that the company grew revenue by an impressive 84% last year. The latest three year period has also seen an incredible overall rise in revenue, aided by its incredible short-term performance. Accordingly, shareholders would have been over the moon with those medium-term rates of revenue growth.

Comparing that recent medium-term revenue trajectory with the industry's one-year growth forecast of 23% shows it's noticeably more attractive.

In light of this, it's peculiar that Novatti Group's P/S sits below the majority of other companies. It looks like most investors are not convinced the company can maintain its recent growth rates.

The Bottom Line On Novatti Group's P/S

Using the price-to-sales ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

Our examination of Novatti Group revealed its three-year revenue trends aren't boosting its P/S anywhere near as much as we would have predicted, given they look better than current industry expectations. When we see robust revenue growth that outpaces the industry, we presume that there are notable underlying risks to the company's future performance, which is exerting downward pressure on the P/S ratio. While recent revenue trends over the past medium-term suggest that the risk of a price decline is low, investors appear to perceive a likelihood of revenue fluctuations in the future.

There are also other vital risk factors to consider and we've discovered 2 warning signs for Novatti Group (1 doesn't sit too well with us!) that you should be aware of before investing here.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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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.